Law Office of Melanie Murray Mfume, LLC -

Loss Mitigation for FHA Loans

For more specific information, review the U.S. Department of Housing and Urban Development Mortgagee Letter 2012-22 released on November 16, 2012.

The new loss mitigation guidelines for FHA loans, effective February 2013, offer the following loss mitigation options:

  • Informal Forbearance
  • Formal Forbearance
  • Special Forbearance
  • Standard Modification
  • FHA HAMP (Partial Claim only)
  • FHA HAMP (Modification only)
  • FHA HAMP (Partial Claim + Modification)

The most notable changes to the guidelines include: 

  • Elimination of the 55% back end debt-to-income ratio
  • Elimination of the 12-month restriction on the amount of PITI that may be included in a partial claim
  • Elimination of the FHA HAMP eligibility requirement that the mortgage be no more than 12 months past due
  • Expansion of FHA HAMP to permit stand-alone modifications, stand-alone partial claims or a combination of partial claim and loan modification
  • Permitting borrowers that failed trial plans to re-apply if their financial circumstances have changed
  • Borrowers cannot have received a standard modification or FHA HAMP in the previous 24 month period

Informal Forbearance - This forbearance option allows for a period of reduced or suspended payments and may provide specific terms for repayment.  This option (along with the formal forbearance) is the only option for borrowers with unverifiable unemployment or increase in expenses (if still employed).  The agreement is verbal, not written, and lasts for a maximum of three (3) months.

Formal Forbearance - This forbearance option allows for a period of reduced or suspended payments and may provide specific terms for repayment. This option (along with the informal forbearance) is the only option for borrowers with unverifiable unemployment or increase in expenses (if still employed).  The agreement is written and lasts between three (3) and six (6) months.
 
Special Forbearance - This forbearance option, also referred to as "Type I Special Forbearance", allows for a period of reduced or suspended payments and may provide specific terms for repayment. This option requires verifiable unemployment. The agreement is written and although it has no maximum duration, the PITI arrears cannot exceed 12 months. Special forbearances are not available until three (3) payments are due and unpaid.

*Until July 31, 2013, the special forbearance agreement must provide for a minimum of 12 months for re-employment and require subsequent evaluation for a more permanent loss mitigation option to cure the default.

Standard Modification - This option will modify the terms of the borrower's loan.  Changes can include reduction in interest rate, term extension and capitalization of arrears. The standard modification requires that the borrower have verifiable loss of income and/or increase in expenses. The borrower must have surplus income that is the greater of $300 or 15% of net monthly income.  Surplus income is calculated by subtracting the borrower's total monthly expenses from the borrower's net monthly income. 

            Surplus income = total monthly expenses - net monthly income

            15% of surplus income = surplus income x .15

To qualify for a standard modification: 85% of the borrower's monthly surplus income must be insufficient to cure the default within six (6) months; and the PITI payment must be able to be reduced by either 10% of the original payment amount or $100.  If 85% of the borrower's monthly surplus income is sufficient to cure the default within six (6) months, then the borrower must be offered a formal forbearance.

FHA HAMP (Partial Claim only) - A partial claim is a non-interest bearing mini-loan that will bring the loan current and possibly include an additional amount for principal deferment.  A partial claim does not modify the terms of the loan.  The borrower will be required to execute a promissory note and subordinate deed of trust for the partial claim.  The partial claim does not have to be repaid until the first of: the maturity of the first mortgage loan, refinance of the first mortgage or the borrower sells the home.  Note: the partial claim is basically a balloon note. This option requires that the borrower have verifiable loss of income and/or increase in expenses but must be employed. The borrower must not have surplus income that is the greater of 15% of her net monthly income or $300. The borrower must not have received a standard modification or FHA HAMP within the previous 24 month period.

To qualify for a FHA HAMP stand-alone partial claim:  the current interest rate must be at or below market rate; and the current payment is at or below the target payment.

FHA HAMP (Modification only) - This option will modify the terms of the borrower's loan. Changes can include reduction in interest rate, term extension and capitalization of arrears. This option requires that the borrower have verifiable loss of income and/or increase in expenses but must be employed. The borrower must not have surplus income that is the greater of 15% of her net monthly income or $300. The borrower must have not received a standard modification or FHA HAMP within the previous 24 month period.

To qualify for a FHA HAMP stand-alone modification: an affordable payment at or below the target payment can be achieved by re-amortizing the mortgage for 360 months at or below the market rate.