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. 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.

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, regardless of the cause of the borrowers' financial difficulties. The COVID-19 loss mitigation waterfall temporarily replaces the general "FHA Waterfall Process" described below. These temporary options, which were previously scheduled to expire at the end of the COVID-19 national emergency, will be available through April 30, 2025.

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 options below 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.

Loan Modification

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.

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.

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 COVID-19 forbearance ends, servicers must review the borrower for a COVID-19 Recovery Standalone Partial Claim.

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.

The COVID-19 Recovery Standalone Partial Claim is limited to 30% of the borrower's unpaid principal balance.

Payment Supplement option. 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.

Lenders can offer the Payment Supplement starting May 1, 2024, and they must start offering it by January 1, 2025. Again, 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 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 (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.

Get More Information

To learn more about loss mitigation options for 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.

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.