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It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

HUD Loss Mitigation: Options for FHA loans

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options-for-FHA-loanThe U.S. Department of Housing and Urban Development (HUD) requires that mortgage lenders do all they can to prevent mortgage foreclosures on Federal Housing Administration (FHA) home loans. If you are in trouble with your FHA mortgage, there are several types of assistance that might be available to you:

  • COVID-19 Advance Loan Modification (ALM)
  • Informal and Formal forbearance
  • Special forbearance
  • FHA-HAMP
  • Partial claim
  • COVID-19 Recovery Modification
  • Payment Supplement
  • Extension of time
  • Assumption
  • Pre-Foreclosure Sale (PFS)
  • Deed-in-Lieu of foreclosure (DIL)

The kind of assistance you might be eligible for depends on your income (is it sufficient to make a modified payment?), situation (do you want to keep your home?), equity position (would someone be willing to assume your loan?), and hardship (is your mortgage problem due to circumstances beyond your control?). There may also be options if you can no longer manage the mortgage obligation and should need to exit the property gracefully. Here is a brief run-down of each option.

A note: Some of the assistance options below have been temporarily replaced by special "COVID-19" versions that were instituted to help offset the unique hardships presented by the pandemic. From a borrower perspective, most aren't very different than the standard programs below, but lenders have some additional reporting and tracking obligations under them.

COVID-19 Advance Loan Modification (ALM)

Available for borrowers who are or become 90 days late on their loans. Program runs through April 30, 2025.

A COVID-19 ALM is a permanent change in one or more terms of a borrower's mortgage that achieves a minimum 25 percent reduction to the borrower's monthly principal & interest (P&I) payment.

A borrower does not need to contact their lender or servicer to be eligible for an ALM; rather, FHA loan servicers will proactively mail the modified mortgage documents to borrowers who can manage the reduced payment.

If the borrower chooses to accept a COVID-19 ALM they only need to sign and return the mortgage modification documents sent to them,

However, ALMs can only be made available if mortgage rates as reported by Freddie Mac are low enough to achieve a 25% reduction in the borrower's payment. If not, other home retention options may be utilized instead, such as an informal or formal forbearance.

Informal and Formal forbearance

Informal forbearance is most commonly an oral agreement negotiated between you and the loan's servicer, and is intended for temporary interruptions in your payment stream of three months or less. Formal forbearance plans are written agreements for catch-up periods that will be longer than three months but not more than six months.

Informal and Formal Forbearance Plans are the only options available for delinquent loan holders who haven't experienced a loss of income or significant increase in living expenses.

Special Forbearance - Unemployment

A Special Forbearance is available only to mortgagors who are unemployed, and is a written agreement between a servicer and a borrower to skip or make partial payments for a time. Borrowers who are at least three months behind on payments may qualify. The maximum delinquency allowed is 12 months of payments, with any unpaid payments added to the mortgage balance and paid over time.

Special Forbearance agreements must provide for a minimum of 12 months for re-employment and require subsequent evaluation for a more permanent solution (loan modification, FHA-HAMP) to eventually get the loan fully back on track.

FHA HAMP

Note: FHA-HAMP has been suspended through April 30, 2025 in favor of other ongoing special COVID-19 home retention programs, including ALM, Standalone Partial Claim, Payment Supplement, Recovery Modification and other options.

Part of the reason for this suspension and extension through spring 2025 is because market-based mortgage rates are so high as to make it nearly impossible for payment relief to be achieved through many of these options.

It is also why the FHA announced a new program called "Payment Supplement" that looks to lower monthly payments despite high mortgage rates, as the program doesn't require modifying the existing loan's terms.

While the original Making Home Affordable Home Affordable Modification Program (HAMP) for conforming and conventional loans disappeared years ago, FHA-HAMP -- fully known as "FHA-HAMP Combination Loan Modification and Partial Claim" continues to this day. FHA's version of HAMP differs from the standard government modification plan in that it combines modification with a partial MI claim advance. In addition to mortgage rate reductions and bringing arrearages current, the FHA HAMP may include a reduction of your principal balance of up to 30%. Here are the particulars:

  • During the first three months, you complete a trial loan modification.
  • You receive a partial advance from your mortgage insurance to bring your loan current.
  • You may receive a reduction of up to 30% of the unpaid principal balance.
  • You cannot be more than 12 months behind on payments.
  • Your interest rate is reduced.
  • Your modified loan must be a 30-year fixed-rate mortgage.
  • Any partial claim loan is interest-free, but must be repaid when you pay off your first mortgage or sell your house.

Partial Claim

If your FHA-backed mortgage is at least three months overdue, but it looks as though you'll be able to resume making require monthly payments, your situation may qualify for a partial claim. This means that some of your mortgage insurance policy (covered by the FHA pool) will be advanced to the lender to cover any delinquencies and arrearages and make your loan current. To qualify, you must have overcome the cause of default (for example, if you lost your job, you must have found a new one), and you must continue to use the home as a primary residence.

In a Partial Claim situation, a borrower receives a second loan in an amount necessary to bring the delinquent FHA loan current. The loan is interest free and does not need to be repaid until you pay off your first mortgage or sell your house.

The standard Partial Claim option has been temporarily superseded by the similar COVID-19 Recovery Standalone Partial Claim option.

Extension of Time

This is a 90-day extension granted to those who have been denied a loan modification and whose mortgage and property are moving into foreclosure proceedings. Borrowers who want to keep their homes get additional time to appeal and pursue mortgage modifications or cure the default.

COVID-19 Recovery Modification

For FHA mortgage holders who can't continue to make their required monthly payments, a COVID-19 Recovery Modification may be the next available step. The Recovery Modification sees the servicer use partial claim funds of up to 30% of the unpaid balance of the loan to cover any overdue amounts to bring the loan current. If the partial claim isn't sufficient to cover these arrearages, they are added back onto the existing loan balance. The servicer will then re-extend the term of the loan to a new 30 or 40 years, and looks to achieve a 15% reduction in the borrower's P&I payment.

Like the other modifications here, the Recovery Modification uses current market interest rates as a basis, and these may not be low enough to achieve a 15% payment reduction with a 30 or even 40 year term. The servicer will first run the calculations with a 30-year term; if the payment reduction goal isn't met, they may use any available partial claim option to lower the loan balance to try to hit the payment goal. If this doesn't do the trick, the servicer will try again using a 40-year loan term.

If neither of these lowers the payment to the desired level, the servicer will look to use the new Payment Supplement option.

Payment Supplement

In February 2024, the FHA established a new loss mitigation option, the Payment Supplement, which combines a standalone partial claim to bring the mortgage current with a new Monthly Principal Reduction (MoPR) payment.

Payment Supplement is intended to temporarily reduce the borrower’s monthly mortgage payment for a period of three years without requiring the mortgage to be modified. After the payment supplement period ends, the borrower will be responsible for resuming payment of the full monthly Principal and Interest (P&I) amount.

The lender will file a claim against the FHA's Mutual Mortgage Insurance Fund (MMIF) in an amount sufficient to cover any arrearages (bringing the loan current) plus an amount sufficient to reduce the borrower's principal and interest payment by up to 25% for a period of three years.

A new zero interest second mortgage for this amount will be issued by FHA. This requires no regular payments by the borrower until the existing first loan is paid off or refinanced, the property is sold or transferred or FHA mortgage insurance on the mortgage is canceled.

Under the payment supplement, the minimum monthly payment reduction must be 5% or more of the existing loan's P&I payment (and not less than $20 per month). The maximum monthly payment reduction is 25% of the existing loan's P&I payment.

Once in place, the borrower sends in the reduced monthly payment and the lender adds the additional funds from a payment supplement account to complete the loan's required payment.

Loan Assumption

Assumption involves having someone else assume the responsibility for making your mortgage payment, as well as take possession of your home. Even if your mortgage has been modified, someone else may be allowed to take it over. The new borrower must first qualify to assume the loan. This may be a viable solution if you aren't underwater (if that were the case, it's unlikely that anyone would want your loan), you can't or don't want to keep the property and have someone who is interested in taking over the obligation.

In light of today's high mortgage rates and the likelihood that an existing loan has a low interest rate, an assumption might allow a homeowner an attractive avenue to exit their property.

Pre-Foreclosure Sale (PFS)

With your lender’s permission you may be able to offer your house for sale and sell it at fair market value even if the amount you receive from the sale is less than the amount you owe. A streamline option is available for borrowers more than 90 days delinquent and whose credit scores are below 620 and who meet additional criteria, while a standard PFS is offered to borrower with a more recent delinquency and who are experiencing a financial hardship that prevents them from making loan payments. If you have documentable financial assets above $5,000 you may be required to commit 20% of any amount above this threshold to help cover the difference in property value compared to the mortgage amount. However, if you meet certain conditions, you may be eligible to receive up to $3,000 to help cover sales costs or pay for a home warranty for the buyer retire any second liens or for relocation expenses.

Note: FHA Pre-Foreclosure Sale (PFS) arrangements been suspended through April 30, 2025 in favor of other special COVID-19 home retention programs. Should the borrower not be eligible for any of those or if those programs not create a sustainable homeownership position, a COVID-19 PFS may be employed.

Deed in Lieu of Foreclosure (DIL)

If the property hasn't been sold after attempting a PFS agreement, the borrower may request to execute a Deed-in-Lieu transaction. This option is for those who don't want to keep their property, and who cannot manage the financial commitment of their mortgage. It is not available to those who have the means to make their payments. It allows a homeowner in default -- who does not qualify for any other HUD loss mitigation option -- to sign the house back over to the mortgage company.

To qualify, you must occupy the home, document a reduction in income or an increase in living expenses, and agree to leave the property clean and undamaged. If you have documentable financial assets above $5,000 you may be required to commit 20% of any amount above this threshold to help cover the difference in property value compared to the mortgage amount. However, according to HUD, you may be paid up to $2,000 to voluntarily turn over the property, but you must have vacated the property before the title changes hands.

A successful DIL transaction will see HUD provide a release for all obligations under the mortgage.

Note: Standard FHA Deed-in-Lieu (DIL) arrangements been suspended through April 30, 2025 in favor of other special COVID-19 home disposition option, such as Covid-19 PFS. In this case, if the homeowner cannot complete a COVID-19 PFS, they may consider a COVID-19 Deed-in-Lieu of Foreclosure (DIL) transaction to exit the property.

Most of the COVID-19 versions of these standard programs are simpler to initiate or can even happen automatically, such as the ALM. Others may require less documentation, like the COVID-19 DIL, where the homeowner is not required to verify their hardship with documentation or other information.

Your first step to help

Please know that the above is a brief summary of the options available. FHA/HUD rules and regulations regarding these are exhaustive and can be complex, so your first call to discuss options that apply to your circumstance should be to your loan's servicer. Their number and website address should be right on your monthly mortgage statement or bill.

Another option is to get information and assistance to contact a HUD mortgage counselor or call Call the FHA Resource Center at 1-800-CALL FHA (800-225-5342) One way or another, you should be able to secure the help you need.

This article was updated by Keith Gumbinger.

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