The 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:
- Informal and Formal forbearance
- Special forbearance
- Partial claim
- Extension of time
- 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.
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.
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's version of the Home Affordable Modification Program (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.
If your FHA-backed mortgage is at least three months overdue, you 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 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.
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.
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.
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.
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.
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 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 contact a HUD mortgage counselor or call HUD’s National Servicing Center at 877-622-8525. 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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