The Federal Housing Administration (FHA)
- modifying all terms of the homeowners mortgage up to a target 25% reduction in their monthly payment; and
- funding all delinquencies and any mortgage principal reduction necessary to achieve the monthly payment reduction as a separate debt the homeowner owes the FHA which is an interest-free, no monthly payment, due on the payoff of the FHA-insured mortgage, non-recourse, and secured by a junior mortgage on title to the home.
Owners of a single-family residence (SFR) as their primary residence, a second home or a rental property encumbered by a delinquent FHA-insured mortgage are eligible for a 40-year mortgage modification and a zero-interest loan plan. The FHA goal is to reduce monthly payments to a level the owner is qualified, by their income, to pay, including a reamortization of the mortgage for 40 years to achieve the result. [HUD Mortgagee Letter 2023-06]
Homebuyers purchasing or refinancing their home are not eligible for the 40-year amortization arrangements. [HUD Mortgagee Letter 2023-06]
Editor’s note — Homeowners experiencing hardship with mortgages held by Fannie Mae and Freddie Mac are already eligible for a 40-year mortgage modification program under the Flex Modification program.
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Homeowners qualified to modify
The mortgage servicer handles all the modification and arrangements with the FHA to fund the delinquencies and any principal reduction needed on the FHA-insured mortgage to attain the target monthly payment amount.
The servicing agent determines the dollar amount of unpaid arrearages. This amount is funded by the separate zero-interest FHA junior mortgage loan from FHA, not the homeowner.
Arrearages include amounts needed to bring the mortgage current, including:
- unpaid accrued interest;
- mortgage advances for property taxes, insurance premiums and other impound items;
- projected shortages for impounded amounts; and
- any legal fees, including foreclosure and bankruptcy.
Once the arrearages are totaled, an attainable monthly mortgage payment is calculated for the homeowner based on their income — the same payment ratios used to qualify for the initial origination of an FHA-insured mortgage.
Further, the principal balance owed to the mortgage lender is reduced — paid by funds from the FHA separate junior lien loan — until the remaining principal attains the reduced level of mortgage payments the homeowner is qualified to pay. When the maximum mortgage principal reduction is reached without achieving the targeted monthly payment, the principal is then reamortized over 40 years for the lowest possible monthly payment.
The FHA calls this modification and junior mortgage lending plan the COVID-19 Loss Mitigation Waterfall Process. A plan available to delinquent – and struggling – homeowners until October 30, 2024.
Stages to target monthly payment
The lender determines the target monthly payment at 25% of the current mortgage payment due on the homeowner’s delinquent FHA mortgage. To obtain the 25% mortgage payment reduction, the FHA insured mortgage may be modified to a 40-year loan.
However, for the FHA junior mortgage loan, the separate loan amount is limited to 30% of the borrower’s unpaid principal balance on their FHA insured mortgage.
The terms of the modification include:
- the mortgage is modified as a fixed rate mortgage (FRM);
- the interest rate meets current rates for 30-year FRMs;
- the FHA-insured modified mortgage remains in first lien on title to the property; and
- the homeowner has the ability to make the modified payment. [HUD Mortgagee Letter 2023-06]
Other existing plans available to homeowners with a delinquent FHA-insured mortgage include forbearance.
On a forbearance, the homeowner’s monthly payments are reduced or payments stop for several months.
When the forbearance is informal as verbally arranged with the lender, the forbearance may be three months of reduced payments or no payments. The forbearance when formally arranged in writing may be for a period exceeding three months of reduced payments or no payments at all.
Further, when an unemployed homeowner cannot make monthly mortgage payments and thus is financially unable to retain ownership of the property, HUD will agree to a short sale as negotiated by the homeowner. When a short sale is not available, the lender is to accept a deed in lieu of the foreclosure.
For more information on this new loan modification option, check out FHA’s National Servicing Center Loss Mitigation Services and subscribe to firsttuesday’s Quilix, for updates on future loan programs!
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