If you have an FHA-insured loan and are struggling to make mortgage payments, HUD has programs to help you avoid foreclosure.
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 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 a "waterfall" process.
Many courts have said that a servicer's failure to comply with HUD guidelines provides a defense to a foreclosure.
FHA Waterfall Process
In FHA's general waterfall 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 foreclosure.
The servicer must evaluate the borrower for these loss mitigation alternatives in the following specific order:
- forbearance (informal, formal, or special forbearance)
- repayment plan
- loan modification
- partial claim
- loan modification plus partial claim
- preforeclosure sale (short sale), or
- deed in lieu of foreclosure.
Once a borrower is eligible for a particular option, the evaluation stops.
Informal, Formal, and Special Forbearances
Under a "forbearance" plan, the borrower makes reduced payments or doesn't make any payments for a specific amount of time.
Informal forbearance. An "informal" forbearance plan is an oral agreement between the servicer and the borrower. The servicer (on the lender's behalf) agrees to let the borrower make reduced payments or to stop making payments for three months or less.
Formal forbearance. A "formal" forbearance plan is a written agreement allowing the borrower to make reduced payments or stop making payments for over three months but not more than six months unless HUD authorizes it.
FHA special forbearance for unemployed homeowners. HUD's "Special Forbearance-Unemployment" option is for borrowers who've become unemployed and can't continue to make their monthly mortgage payments.
Repayment Plan
The servicer will also evaluate whether the borrower has enough income for a repayment plan.
Loan Modification
A "loan modification" is a permanent change to one or more terms in the borrower's mortgage. In a modification, the servicer might:
- lower the interest rate
- capitalize the delinquent principal, interest, or escrow amounts
- extend the time the borrower has to repay the mortgage, or
- re-amortize the balance due.
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." (However, FHA temporarily suspended its FHA-HAMP option through October 30, 2024.)
Partial Claim
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.
Preforeclosure Sale (Short Sale)
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.
Deed in Lieu of Foreclosure
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.
COVID-19 Loss Mitigation Waterfall
FHA offers an expanded list of alternatives to help homeowners affected by the COVID-19 national emergency. So, the waterfall for borrowers affected by COVID-19 looks a little different.
Again, servicers must offer these options to all borrowers, including non-occupant borrowers, starting April 2023, no matter the cause of the borrowers' financial hardships.
The waterfall looks like this:
- COVID-19 forbearance (if COVID isn't the cause of your financial issues, the servicer must evaluate you for an informal, formal, or special forbearance) (FHA says you must request an initial COVID-19 forbearance from your mortgage servicer by May 31, 2023, and no COVID-19 forbearance period may extend beyond November 30, 2023)
- COVID-19 Advance Loan Modification
- COVID-19 Recovery Standalone Partial Claim
- COVID-19 Recovery Modification
- COVID-19 Recovery Non-Occupant Loan Modification
- COVID-19 preforeclosure sale, and
- COVID-19 deed in lieu of foreclosure.
How a COVID-19 Advance Loan Modification Works
On June 25, 2021, HUD established the COVID-19 Advance Loan Modification (COVID-19 ALM). Under this modification program, eligible borrowers get a minimum 25% reduction of their monthly mortgage payment's principal and interest portion.
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.
How a COVID-19 Recovery Standalone Partial Claim Works
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 30% of the borrower's unpaid principal balance.
How a COVID-19 Recovery Modification and COVID-19 Recovery Non-Occupant Loan Modification Works
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 (30-year) or 480-month (40-year) 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.
COVID-19 Preforeclosure Sale (Short Sale)
You might be eligible for a preforeclosure sale if you don't qualify for any previous options.
COVID-19 Deed in Lieu of Foreclosure
Or you might qualify for a deed in lieu of foreclosure.
For More Information
To learn more about loss mitigation options for FHA-backed loans, see HUD's Loss Mitigation Services for FHA Homeowners website. Contact your loan servicer directly to learn what options are available in your particular situation. 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. Talking to a (free) HUD-approved housing counselor is also a good idea.
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