The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), offers protections and options to homeowners who have FHA-insured loans and are facing foreclosure.
Under HUD policy, the loan's servicer must review a borrower who has an FHA-insured loan and is behind in payments, or about to fall behind, for loss mitigation alternatives using what's called a "waterfall" process.
In this process, the servicer usually, subject to a few exceptions, has to evaluate the borrower to determine which, if any, of the below options is appropriate to avoid a foreclosure. The servicer must evaluate the borrower for these loss mitigation alternatives in the following specific order:
Once a borrower is eligible for a particular option, the evaluation stops.
Under a "forbearance" plan, the borrower makes reduced payments, or doesn't make any payments, for a specific amount of time.
An "informal" forbearance plan is an oral agreement between the servicer and borrower. The servicer (on the lender's behalf) agrees to let the borrower make reduced payments or to stop making payments for a period of three months or less.
The servicer will also evaluate whether the borrower has enough income and a sufficiently reasonable payment for a repayment plan.
While the federal Home Affordable Modification Program (HAMP) and its associated programs expired at the end of 2016, FHA still calls its main loan modification program "FHA-HAMP."
A "partial claim" is an interest-free loan from HUD to get caught up on overdue payments. The loan doesn't have to be repaid until the first mortgage is paid off, like when you sell the property.
Partial claims are sometimes completed along with a loan modification.
A "preforeclosure sale" (short sale) is when the borrower sells the home for less than the amount owed on the mortgage loan. After an FHA preforeclosure sale, the lender can't get a deficiency judgment.
With a "deed in lieu of foreclosure," the borrower voluntarily offers the home's deed to HUD in exchange for a release from all obligations under the mortgage. Following an FHA deed in lieu of foreclosure, the lender can't get a deficiency judgment.
An analysis for a deed in lieu of foreclosure is the end of the standard FHA loss mitigation waterfall. The waterfall for borrowers affected by COVID-19 looks a little different.
FHA offers an expanded list of alternatives to help homeowners affected by the COVID-19 national emergency. For borrowers with coronavirus-related financial hardships, the waterfall looks like this:
On June 25, 2021, HUD established the COVID-19 Advance Loan Modification (COVID-19 ALM). No later than August 24, 2021, servicers must review the following borrowers for a COVID-19 ALM if final documents to complete a loss mitigation option haven't been sent to the borrower as of June 25, 2021:
Under this modification program, eligible borrowers get a minimum 25% reduction to their monthly mortgage payment's principal and interest portion.
The program is automatic: lenders must review eligible borrowers for this option and provide loan modification documents that will significantly reduce the borrowers' monthly payments. Borrowers don't need to contact their lender or servicer to get this modification.
To qualify, the property may be owner-occupied or non-owner-occupied, and the borrower must be 90 or more days delinquent. Borrowers who don't qualify for the COVID-19 ALM must be evaluated for the other COVID-19 loss mitigation options described below.
If the borrower indicates an ability to resume making their pre-hardship mortgage payment, say, after their existing COVID-19 forbearance ends, servicers must review the borrower for a COVID-19 Recovery Standalone Partial Claim.
The COVID-19 Recovery Standalone Partial Claim is limited to 25% of the borrower's unpaid principal balance.
If the borrower can't afford the monthly payment amount and needs a loan modification, the servicer must evaluate the borrower for a COVID-19 Recovery Modification.
This kind of modification aims to reduce the principal and interest portion of the monthly mortgage payment by at least 25%. The COVID-19 Recovery Modification is a 360-month modification, and includes a partial claim, if available.
This modification is available to owner-occupied properties and properties that are not owner-occupied, like rental properties, secondary residences, and vacation homes.
To learn more about loss mitigation options for FHA-backed loans, see HUD's Loss Mitigation Services for FHA Homeowners website. To learn what options are available in your particular situation, contact your loan servicer directly. Be sure to mention you have an FHA-backed loan.
If you need help dealing with your loan servicer, want more information about different ways to avoid foreclosure, or are seeking information about how to fight a foreclosure, consider talking to a foreclosure attorney. It's also a good idea to talk to a (free) HUD-approved housing counselor.