Help for Homeowners With FHA Loans

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. FHA loss mitigation programs include:

• repayment plans
• forbearance options
• loan modifications
• partial claims
• preforeclosure sales, and
• other options.

The bottom line is that if you have an FHA-insured mortgage loan, you have access to a range of loss mitigation options designed to help you avoid foreclosure and, in many scenarios, keep your home. This article describes those options.

Understanding FHA Loss Mitigation: How to Avoid Foreclosure on Your FHA-Insured Mortgage

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 (ways to avoid foreclosure) using a waterfall process. The term "waterfall" refers to a structured process that loan servicers must use to evaluate FHA-insured loans for foreclosure alternatives.

As of April 30, 2023, loan servicers must evaluate all eligible borrowers with FHA-insured mortgages who are in default or facing imminent default using the COVID-19 loss mitigation waterfall process (see below), regardless of the cause of the borrowers' financial difficulties. The COVID-19 loss mitigation waterfall temporarily replaces the regular FHA waterfall for all borrowers. These temporary options, which were previously scheduled to expire at the end of the COVID-19 national emergency, will be available through September 30, 2025.

Many courts have said that a servicer's failure to comply with HUD guidelines provides a defense to a foreclosure.

Regular FHA Waterfall Process (Paused Through September 30, 2025)

In FHA's general waterfall process, the servicer has to evaluate the borrower to determine which, if any, of the options below is appropriate to avoid foreclosure.

The servicer must evaluate the borrower for these loss mitigation alternatives in the following order:

• repayment plan
• forbearance
• standalone partial claim
• standalone loan modification
• loan modification plus partial claim
• payment supplement
• outside of the waterfall loan modification
• preforeclosure sale (short sale), or
• deed in lieu of foreclosure.

Once a borrower is eligible for a particular option, the evaluation stops.

Repayment Plan: Getting Caught Up on Payments

FHA Loan Forbearance: Temporary Relief for Borrowers Facing Hardship

Under a "forbearance" plan, the borrower makes reduced payments or doesn't make any payments for a specific amount of time.

A "partial claim" is an interest-free loan from HUD to get caught up on overdue payments. After getting a partial claim, the borrower is supposed to resume making their regular monthly payments. The loan doesn't have to be repaid until the first mortgage is paid off, like when you sell the property.

Standalone Loan Modification: Reducing Your Monthly Mortgage Payment

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.

Loan Modification Plus Partial Claim

Partial claims are sometimes completed along with a loan modification.

Payment Supplement

The payment supplement option uses partial claim funds to bring the borrower's mortgage current. It also uses partial claim funds to temporarily reduce the principal portion of the monthly mortgage payment for 36 months without modifying the mortgage. The payment supplement is only repaid when the borrower sells or refinances the home, or the mortgage is otherwise extinguished.

Outside of the Waterfall Loan Modifications

This kind of modification is used when the standard modifications in the waterfall don't provide sufficient relief to make the borrower's monthly payments affordable.

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 waterfall.

COVID-19 Loss Mitigation Waterfall (Available From April 2023 Through September 30, 2025)

While this waterfall process is called the "COVID-19" loss mitigation waterfall, servicers must offer these options to all borrowers, including non-occupant borrowers, starting April 2023 through September 30, 2025, no matter the cause of the borrowers' financial hardships.

The waterfall looks like this:

• forbearance
• 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.

Again, FHA is using this waterfall through September 30, 2025, even though most borrowers aren't in financial distress due to COVID-19. You can qualify for one of these assistance programs if you have a different type of financial hardship, such as job loss, divorce, or the death of a wage earner who contributed to mortgage payments.

Forbearances Under the COVID-19 Waterfall

A forbearance is a temporary agreement between a borrower and a lender that allows the borrower to pause or reduce loan payments during a period of financial hardship.

• 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.

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.

The program is automatic and is a pre-waterfall step: 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.

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 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.

Again, a partial claim is an interest-free loan from HUD that brings a first mortgage current by paying the overdue amounts. You don't have to repay the loan until the first mortgage is paid off, like when you sell the property. Sometimes, the servicer will complete a partial claim along with a modification.

If you can't afford to resume making your regular payments after getting a partial claim, you might be eligible for FHA's payment supplement option. The partial claim can bring you current on your mortgage by paying off overdue amounts, and the payment supplement option uses remaining partial claim funds to pay some of your mortgage payment each month, reducing your monthly payment. This option can reduce your payments by as much as 25% for up to three years. Then, you go back to making your regular payments. A partial claim can total up to 30% of your mortgage balance. So, you won't qualify for this option if you've already used up your partial claim allowance.

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 aren't owner-occupied, like rental properties, secondary residences, and vacation homes.

COVID-19 Preforeclosure Sale (Short Sale)

You might be eligible for a preforeclosure sale (short 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.

Help for Homeowners Facing Foreclosure After a Natural Disaster

After a natural disaster, like a hurricane or wildfire, you might qualify for certain foreclosure protections, like a moratorium. Generally, you can qualify for a moratorium if you have an FHA-insured loan (or a Fannie Mae, Freddie Mac, or VA-guaranteed loan), and you meet specific criteria. HUD often provides a 90-day moratorium on foreclosures of FHA-insured home mortgages following natural disasters.

Other Help for FHA Borrowers After a Natural Disaster

In some cases, FHA offers loan modifications and forbearances to borrowers who went through a disaster and are struggling to make their mortgage payments.

Learn More About Disaster Relief for Borrowers With FHA Loans

To get more information about different options for homeowners after a natural disaster, go to FHA's Disaster Relief Options for FHA Homeowners website.

Frequently Asked Questions (FAQs) About FHA Loss Mitigation Options

Here are some other questions you might have about FHA loss mitigation options.

What is FHA loss mitigation?

FHA loss mitigation refers to a set of programs and options that the FHA offers to help borrowers with FHA-insured mortgages avoid foreclosure. These options include repayment plans, forbearances, loan modifications, partial claims, preforeclosure sales (short sales), and deeds-in-lieu of foreclosure.

Who is eligible for FHA loss mitigation programs?

Homeowners with FHA-insured mortgage loans who are experiencing financial hardship, such as job loss, reduced income, illness, or other challenges, may qualify for loss mitigation assistance. Eligibility requirements vary by program, so it's important to contact your loan servicer to discuss your specific situation.

How do I apply for FHA loss mitigation assistance?

Contact your mortgage servicer as soon as you anticipate having trouble making your mortgage payments. The servicer will review your financial situation and help you through the application process for available loss mitigation options. If you need help dealing with your loan servicer in the loss mitigation process, a HUD-approved housing counselor can assist you at no cost.

Will using FHA loss mitigation options affect my credit?

While loss mitigation options are designed to help you avoid foreclosure, they'll probably impact your credit. How much impact loss mitigation will have depends on the option you get. A repayment plan might not impact your credit much, especially if you make timely monthly payments once you get caught up on the loan. A short sale or deed in lieu of foreclosure, on the other hand, will impact it more severely.

Getting Help With FHA Loss Mitigation

To learn more about loss mitigation options for homeowners with FHA-backed loans, see HUD's Loss Mitigation Services for FHA Homeowners website. You can also call the FHA Resource Center at 800-CALL FHA (800-225-5342), go to the online FHA Resource Center, or email the FHA Resource Center at [email protected].

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 (although they should already have this information).

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.