FHA Workout options for distressed homeowners
At the onset of our current economic recession, the majority of distressed homeowners having difficulty paying their mortgage came from the subprime sector where borrowers were facing adjustable interest rates. As the markets have continued to worsen and unemployment/wage reductions have increased, these defaults have expanded to include all types of mortgages, including FHA. However, one of the benefits of an FHA mortgage is that there are many workout options in place to assist borrowers. The following are just a few of the workout options that the Department of Housing and Urban Development (federal agency that regulates and insures FHA mortgages – HUD) has in place:
Special Forbearance
Loan Modification
FHA’s Home Affordable Modification
Partial Claim
Pre-Foreclosure Sale Program
Deed-In-Lieu of Foreclosure
Special Forbearance
This option consists of a plan which will allow the mortgagor to reinstate their loan by creating installment payments that will allow a borrower to get caught up on their missed payments. The installment amount is based on the mortgagor’s ability to pay, and has minimum duration of be 4-6 months depending on whether or not the forbearance payments are an increased amount. There is no maximum duration on the forbearance period, but the maximum arrearage due may not exceed 12 of Principle, Interest, Taxes and Insurance (PITI).
The special Forbearance Option is broken into Type I and Type II.
A Type I forbearance if for borrowers who’s cause for their default is due to the loss of employment. Prior to the unemployment period; the mortgagor must have had a good payment history, and a stable employment. Mortgagor must also agree to actively seek employment during the term of the Special Forbearance.
The Type II Forbearance consists of both a short-term forbearance period, and a Loan Modification or Partial Claim. To qualify under type II, the mortgagor must have a verifiable reduction in their income, or increase in their living expenses. The loan must also be past dues for a minimum of three months, but not to exceed twelve months.
Loan Modification
A Loan Modification will consist of a permanent change to one or more of the mortgagor’s loan terms, in order to reinstate the loan with a payment based on what the mortgagor can afford. Some of the terms that can be modified are as follows:
FHA Loan Modification FAQ
– Interest rate reduction
– Extension of the term of the loan
– Capitalization of all delinquent payments plus additional fees incurred
– Once modified, a re-amortization of the new loan balance
In order to be eligible for a modification; the borrower must be in default by a minimum of three payments, and the loan must be at least twelve months old. The default must be due to a loss of income or increase in expenses, and the borrower must be able to show the ability to afford the new modified payment amount.
FHA’s Making Home Affordable Program
This program was implemented in order to mimic Obama’s Making Home Affordable modification program, in hopes of providing borrowers the option to lower their mortgage payment and allowing them to keep their homes. The guidelines are not exactly the same, but they are very similar.
The program results in a combination of a partial claim with a loan modification. To qualify, the following guidelines must be met:
– Borrowers must complete a three month trial period, before modification becomes permanent.
– Must be a minimum of thirty days behind, but cannot be more than twelve months delinquent
– Borrower’s total debt to income ratio must not exceed 55% after the modification
If a borrower qualifies, the total monthly mortgage payment (PITI) shall be reduced to 31% of the borrower’s gross monthly income. In addition, the modification may consist of a principal buy-down of up to 30% of the principal balance.
Partial Claim
This option allows for the mortgagee to advance the necessary funds on behalf of the borrower in order to reinstate the loan. In order for the mortgagee to get repaid on this amount, a Subordinate lien will be recorded against the property as a second mortgage. This amount is then due in the event the property is sold, or the first mortgage is paid off. If approved for a partial claim, any late fees should be waived.
To qualify for a partial claim; the loan must be a minimum of four months delinquent, and the original cause of the default must have been resolved. The property must also remain owner occupied as a primary residence.
Pre-foreclosure Sale Program
In the event a borrower is unable or unwilling to participate in any of the Home Retention Options, HUD does allow for a borrower to sell his/her home in order to satisfy their debt. In the event the home is underwater, HUD will allow for the property to sell for less than is owed (short sale). There are several incentives to both the borrower and lender under this program. In addition to satisfying the total debt, borrowers may also receive up to $1,000 for participating in the program.
In order to qualify for the program; the property must be owner-occupied, the mortgagor must be a minimum of thirty-one (31) days delinquent at the time of the sale, and the mortgagor must be able to verify a reduction in income, or increase in living expense.
After determining borrower eligibility, the mortgagee will order an appraisal of the property in order to determine its value. Once value has been established, the mortgagee may agree to allow for the sale of the property if the following net proceed amounts are met:
– The mortgagee may approve an offer that will result in minimum net proceeds equal to 88%, within the first 30 days of marketing.
– If no offer is received in the first 30 days, this amount is reduced to 86% for the next 30 day timeframe.
– If after the first 60 days, no offer is received, then the mortgagee may approve offers with minimum net proceeds equal to 84% of more for the remaining time the property is on the market.
– The program also allows for traditional closing costs to be paid through the gross proceeds of the sale. However, the following fees are not allowed: repair allowances, home warranty fees, lender discount points on non FHA-financing, and Lender title insurance.
Deed-In-Lieu of Foreclosure
In the event a borrower doesn’t qualify for any other work out option, or is unable to sell the property under the Pre-foreclosure sale program, the borrower may sign the home back over to the mortgage company. Under this option, the mortgagee must agree to not pursue the borrower for any deficiency judgments.
In order to qualify for the program; the property must be owner-occupied, the mortgagor must be a minimum of thirty-one (31) days delinquent at the time of the sale, and the mortgagor must be able to verify a reduction in income, or increase in living expense.
If a borrower qualifies, they may receive up to $2,000 from the mortgagee after they have vacated the property.
Not all the options and facts available buy HUD are listed in this post. For a complete list of available options, and to determine what options you may qualify for, it is recommended that you contact your servicer and/or HUD’s National Servicing Center at: 1-888-297-8685.
Or on the web at: National Servicing Center
Related Posts:
Foreclosure Prevention Options
FHA Short Refi for non FHA Borrowers
Hope for Homeowners
Making Home Affordable Q & AHAFA – Home Affordable Foreclosure Alternative – Program Guidelines
Should you have any questions or need further information,
please don’t hesitate to contact me, (775) 220-1630
Or visit my website: www.SellingHomesinReno.com
Joshua Talayka
NAR designated: Short Sale & Foreclosure Resource
Chase International
Office: 775 850 5900
Toll Free: 877 922 5900
Cell: 775 220 1630
Fax: 775 850 5901
985 Damonte Ranch Pkwy, Ste. 110
Reno, Nevada (NV) 89521
Legal disclaimer: I am not an attorney, tax professional, modification specialist or credit counselor. The information contained in this article/blog is intended to provide general information on the subject and not to provide any legal, tax, or credit advice. You should not act upon this or any information without first seeking independent tax and/or legal counsel..
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