This may be a dumb question, but if a loan is secured by the FHA or VA, then how is it possible that the loan can go into foreclosure? Can’t the lender call the fha or va and demand that the guarantee be enforced? Or does the lender have to wait until the property is reo before they can file a claim with the fha/va?
Anyone?
Did I stump everybody?
VA and FHA don’t “secure” mortgage loans. A VA loan, FHA loan, and any other conventional real estate loan is secured by the property that the loan was used to purchase.
When the borrower quits making his monthly mortgage payments, the loan is in default. When the borrower defaults on his loan, the lender forecloses on the property.
It is that simple. The lenders who made these VA and FHA loans foreclose when the borrower quits making the loan payments. If the foreclosure sale does not generate enough money to pay off the defaulted loan, then the lender takes title to the property. Once the lender has title by foreclosure, the lender can file a claim with the VA or the FHA to recover their loss up to the limit of the insurance or guarantee. FHA insures the top 20% of the purchase price, while VA guarantees the top 25%.
If the claim is paid, then VA or HUD takes title to the property, adds it to their REO inventory, and resells it to recover their payment to the lender.
My understanding may be imperfect, but this is just how I see it.
yeah, that’s about it. Good explanation Dave.
GooD LucK! :beer
Thanks guys for that answer. It explains a lot. But regarding the insurance limit, what do you mean when you say the “top” 20 or 25%? What is “top” referring to?
For conventional loans, the mortgage insurance applies to the top 20% of the purchase price. That is why you don’t need PMI with a conventional loan if you are putting at least 20% down. If you put only 10% down, then PMI will cover the other last 10% of your purchase price. In other words, with 80% financing, the lender assumes all the risk of loan default. With 90% financing, the lender’s risk is the first 80% of your purchase price, the mortgage insurer’s risk is the next 10%. With 100% financing in a primary mortage, the lender’s risk is the first 80%, the mortgage insurer’s risk is the last (or top) 20%.
If you purchase a property for $100K and use 97% financing on an FHA first time buyer loan program, the lender assumes the risk of default for the first $80K of the purchase price while FHA’s mortgage insurance will cover the next $17K of the purchase price or the difference between $80K and the $97K loan amount.
For VA loans, if the veteran used 100% financing, then the VA guarantee is the last (or top) 25% of the loan amount.