Avoiding Foreclosure on USDA Home Loans

The United States Department of Agriculture (USDA) offers home loans to eligible borrowers in rural areas through its Rural Housing Service These loans help low- and moderate-income families achieve homeownership However, like any mortgage, USDA home loans can go into default and foreclosure if borrowers have trouble making their payments.

The good news is that USDA provides options to avoid foreclosure, especially during challenging times like the COVID-19 pandemic Here is what borrowers with USDA direct and guaranteed home loans need to know about avoiding foreclosure

USDA’s Foreclosure and Eviction Moratorium

In response to the financial hardships caused by COVID-19 the USDA instituted a moratorium on foreclosures and evictions for Single Family Housing direct and guaranteed loans. This moratorium has been extended multiple times most recently through July 31, 2021.

The moratorium prohibits:

• Initiation of new foreclosures or completion of foreclosures already in process, excluding vacant/abandoned properties
• Eviction of homeowners with USDA direct or guaranteed loans

This protection gives borrowers critical time to get back on their feet financially and avoid losing their homes.

Mortgage Payment Forbearance

In addition to stopping foreclosures, the USDA offers mortgage payment forbearance to provide temporary relief to borrowers.

Forbearance for Direct Loans

• Borrowers may request up to 180 days of initial forbearance.
• This can be extended for another 180 days at the borrower’s request.
• No fees, penalties or additional interest can accrue during forbearance.
• When forbearance ends, borrowers can resume payments or pursue repayment options like term extensions or payment deferrals.

Forbearance for Guaranteed Loans

• Lenders can offer up to 180 days initial forbearance.
• This is extendable for another 180 days at the borrower’s request.
• No fees, penalties or additional interest during forbearance period.
• Borrowers can resume payments or pursue assistance options when forbearance ends.

Forbearance offers struggling borrowers a chance to regroup financially without facing foreclosure.

Loan Service and Relief Options

USDA-approved lenders have additional tools to assist borrowers at risk of foreclosure on guaranteed loans:

• Loan term extensions
• Payment capitalization
• Mortgage recovery advances

These options are outlined in the USDA’s Technical Assistance Handbook. Lenders can tailor relief based on the borrower’s needs.

Steps Borrowers Should Take

If you have a USDA home loan and are struggling to make payments, take action now to avoid foreclosure:

Direct Loans:

• Contact USDA Rural Development at 1-800-793-8861 or [email protected]
• Request forbearance of up to 360 days
• Discuss repayment or relief options once forbearance ends

Guaranteed Loans:

• Contact your lender immediately
• Ask about forbearance and relief programs
• Be prepared to show COVID-19 impact on your finances
• Consider loan modification options

Don’t wait – you have protections in place but must take the first step. The USDA can halt foreclosure proceedings and help you avoid losing your home.

USDA Foreclosure Avoidance Tips

Here are some tips to help avoid foreclosure on your USDA home loan:

• Contact your lender/USDA right away – Communication is key. The earlier you seek help, the more options are available.

• Prioritize mortgage payments – If money is tight, make the mortgage payment your top priority and cut expenses elsewhere.

• Explore repayment plans – Set up an affordable repayment schedule for missed payments with your lender.

• Modify your loan terms – Extending the repayment timeline or lowering payments can help.

• Sell your property – This is a last resort but lets you avoid foreclosure.

• Avoid scams – Beware of any offers that seem too good to be true. Stick with your lender/USDA.

• Know your rights – USDA borrowers have strong foreclosure protections in place. Use them.

With the right approach, open communication, and help from the USDA or your lender, you can navigate through financial challenges without losing your home. Don’t despair or ignore the situation – take action to protect your housing stability and financial future.

Eligibility and Application Process for USDA Home Loans

To understand how USDA home loans work, it helps to know the eligibility requirements and application process:

Eligibility

To qualify for a USDA home loan, borrowers must:

• Have low or moderate income (within established limits based on area median income)
• Have sufficient steady income to repay the loan
• Have acceptable credit history
• Be unable to secure a traditional loan

The home must be located in an eligible rural area. Income limits and eligible areas can be checked on the USDA site.

Applying for a Loan

The process involves:

• Finding a USDA-approved lender
• Providing documents to verify income, assets, credit, and eligibility
• Undergoing homeownership education if you are a first-time buyer
• Selecting a USDA-eligible property and making an offer
• Completing the lending process with the institution
• Closing on the home

USDA has network of approved lenders nationwide. You can search for one easily on their site.

USDA Direct Versus Guaranteed Loans

The USDA operates two types of Single Family Housing loans:

Direct loans are funded entirely by the USDA Rural Housing Service.

Guaranteed loans are provided by private lenders but guaranteed by the USDA against payment default.

Both offer:

• 100% financing – no down payment required
• Below market interest rates
• Low fees and closing costs
• No prepayment penalties

Guaranteed loans often have lower rates but more stringent credit requirements than direct loans. Talk to approved lenders to determine the better option for your situation.

Alternatives to Foreclosure

Foreclosure is always the lender’s last resort. When borrowers work with their lender or the USDA early on, there are always alternatives that can be pursued:

• Repayment plan – Set up affordable installments to repay missed payments over time.

• Loan modification – Adjust loan terms by extending the repayment period, lowering the interest rate, or deferring payments.

• Special forbearance – Suspend or reduce payments for a set period of time.

• Partial claim – USDA provides funds to bring a delinquent direct loan current.

• Pre-foreclosure sale – Sell the property to avoid foreclosure and satisfy the unpaid mortgage balance.

Don’t give up hope if you get behind on your USDA home loan payments. There are always options to help responsible borrowers stay in their home. Contact your lender or USDA today to discuss your specific situation and create a workable plan.

The Foreclosure Process on USDA Loans

If alternatives are not pursued and payments remain delinquent, the foreclosure process will eventually start. Here is how it works:

Notice of Default Issued

The lender issues a formal notice stating the loan is in default and allowing 30 days to resolve the deficiency.

Acceleration Letter

If default status remains after 30 days, an acceleration letter is sent declaring the full mortgage balance due immediately. At this point, the property may be referred to an attorney to initiate foreclosure.

Notice of Foreclosure

The attorney will send a Notice of Foreclosure Sale announcing a date for public auction of the property. This must be at least 30 days in advance.

Public Auction

On the scheduled date, an auction is held where the property is sold to the highest bidder. This is usually the mortgage lender.

Eviction

The new owner can initiate eviction proceedings to remove former owners/occupants from the property.

This is a general overview – timelines and processes vary by state. The key takeaway is that foreclosure does not happen overnight. There is time to take preventive steps if you contact your lender promptly after defaulting.

Foreclosure Impacts and Rebuilding Credit

Losing your home to foreclosure has devastating financial consequences:

• Credit score damage – A foreclosure remains on your credit history for 7 years and significantly lowers your score.

• Deficiency judgment – If the foreclosure sale does not fully cover your mortgage balance, you may owe the difference.

• Future borrowing challenges – It becomes very difficult to qualify for financing due to the credit impacts.

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