January 15, 2009

Deficiency Judgment with an FHA Foreclosure?

My husband died 6 years ago and I have used every resource to stay in our home since it didn’t sell. I’m about $1,000.00 short every month now. I’m looking at foreclosure. I just refinanced in Dec 2009 and have a FHA mortgage.  Will I be responsible for the difference of what the house eventually sells for and the balance on the mortgage?

Madison

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Hi Madison,

You couldn’t have refinanced in December 2009 (because it’s January ’09), so I don’t know when you refinanced although that is a non-issue.  You have an FHA loan and if you enter the FHA short sale program or more accurately stated the FHA pre-foreclosure sale program and follow through with what is required (i.e. signing and returning Form HUD-90045 ‘Approval To Participate’ back to the lender within 7 days of receipt and following the rules that are contained therein) then you won’t be “responsible for the difference of what the house eventually sells for and the balance on the mortgage” if the property does not sell as a short sale and ultimately becomes a foreclosure. Specifically, page five of Mortgagee Letter 2008-43 states:

“A PFS sale must be an outright sale of the property.  If a foreclosure occurs after the mortgagor unsuccessfully participated in the PFS process in good faith, neither the mortgagee nor HUD will pursue the mortgagor for a deficiency judgment.”

On a side note, another nice piece of information that I noticed in the December 24, 2008 FHA pre-foreclosure sale guidelines is the following:

“On the 32nd day but, no later than the 60th day of delinquency, the mortgagee shall send the delinquent borrower a pamphlet (HUD-PA-426, How To Avoid Foreclosure) about foreclosure avoidance.   This pamphlet provides mortgagors with important information about loss mitigation alternatives, which include the pre-foreclosure sale option.”

The above notice requirement is a new requirement and homeowners with FHA loans should be vigilant as to whether or not they received the HUD-PA-426 pamphlet postmarked prior by the 60th day of delinquency.  If the homeowner does not receive this timely pamphlet, then the foreclosing FHA lender may be guilty of failure of good faith and fair dealing, unclean hands, illegal charges added to the balance, and illegal consumer collection – and in addition to these defenses and counterclaims, in Florida at least, there is case law that establishes that failure to provide such timely notices precludes summary judgment (which means no quickie foreclosure for the big bad lender).

Madison, call your lender and ask about the FHA pre-foreclosure sale program or, if your sevicer is not cooperative, you can call HUD’s national oversight for loss mitigation at 888.297.8685.

Thanks for the questions and hope this helps.

Paul

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.

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