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, and once a borrower is deemed eligible for a particular option, the evaluation stops:
forbearance (informal, formal, or a special forbearance)
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.
A "formal" forbearance plan is a written agreement that allows the borrower to make reduced payments or to stop making payments for a period greater than three months, but not more than six months unless otherwise authorized by HUD.
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.
The servicer will also evaluate whether the borrower has enough income and a sufficiently reasonable payment for a repayment plan.
A "loan modification" is a permanent change to one or more terms in the borrower's mortgage. A modification might:
lower the interest rate
capitalize the delinquent principal, interest, or escrow amounts
extend the time the borrower has to repay the mortgage, or
A "partial claim" is an interest-free loan from HUD to get caught up on the 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.
For More Information
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.