The most straightforward way to determine whether a loan is an FHA-insured loan is to look at the mortgage, which is available online in ACRIS or the County Clerk’s office. FHA loans have an FHA case number in the top-right corner of the mortgage. Another way is to look at the mortgage statement and see if there is a line item for a Mortgage Insurance Premium (MIP).
In addition to the FHA Formal or Informal Forbearance options, borrowers can apply for the FHA-HAMP modification. FHA modifications are not subject to a Net Present Value (NPV) Test as the former Making Home Affordable modifications were.
To calculate a borrower’s workout options, the advocate should use MFY’s waterfall worksheet for FHA-HAMP. Some organizations print out the MFY worksheet to accompany the advocacy letter when submitting packages to strengthen the modification application.
You can also find updated guidance and waterfall steps to all FHA options in HUD’s Mortgagee Letter 2016-14.
Tip
Many FHA mortgages have been sold through HUD’s Distressed Asset Stabilization Program (DASP). If this is the case, the rules of FHA loss mitigation do not apply.
FHA-HAMP
Unlike the Making Home Affordable HAMP program, FHA-HAMP is still an active program. Borrowers do not need to be reviewed for FHA forbearances and FHA Loan Modification options first before applying for FHA-HAMP. The previously-available FHA Loan Modification has been incorporated into FHA-HAMP, and borrowers in imminent risk of default are eligible for FHA-HAMP.
FHA-HAMP requirements:
- the owner-occupied borrower experienced a verifiable loss of income or increase in expenses.
- the first payment on the loan was due at least a year prior to evaluation and the borrower has made at least 4 payments.
Within FHA-HAMP, loss mitigation takes three distinct forms:
- Stand-Alone Partial Claim
- Stand-Alone Loan Modification
- Modification coupled with a Partial Claim
The Partial Claim is unique to FHA loans. It is a credit insurance claim that HUD pays out to the lender to bring the loan current. Because the claim payment is in an amount less than the total insured mortgage balance, it is considered a “Partial Claim.” A Partial Claim can be used to cover arrears, legal fees, foreclosure related costs, and principal deferment. It creates a second, no interest mortgage payable to HUD that comes due with the first mortgage or when the borrower no longer owns the property. When a Partial Claim is awarded through a Stand-Alone Partial Claim reinstatement, the lender advances the funds to the borrower, and then HUD reimburses the lender and provides an incentive payment. The size of a Partial Claim is limited to 30% of the unpaid principal balance at the time the borrower defaulted, less the amount of any previously awarded Partial Claim.
A Stand-Alone Partial Claim is available where the terms of the mortgage are otherwise favorable, but the borrower needs help reinstating the mortgage. To qualify for a Stand-Alone Partial Claim, three conditions must be met: (1) the current interest rate on the loan is at or below the Market Rate; (2) borrower’s current payment is at or below the target payment, which is defined below; and (3) the borrower meets all FHA-HAMP eligibility requirements. Given the requirements that the interest rate be low and the payments affordable, the Stand-Alone Partial Claim is likely designed to assist borrowers who have fallen behind on loans previously modified. A borrower who receives a Stand-Alone Partial claim will receive a Partial Claim in an amount sufficient to reinstate the mortgage. The terms of the mortgage will not be changed.
Borrowers who do not qualify for a Stand-Alone Partial Claim are evaluated for a Stand-Alone Loan Modification. A Stand-Alone Loan Modification is identical to a FHA Loan Modification: the arrears are capitalized, the term is re-amortized to 360 months, and the interest rate is set to the Market Rate. Legal fees and foreclosure costs can be capitalized, but late fees may not be charged and HUD will only reimburse legal fees up to a set maximum. If this modification produces a payment at or below the borrower’s target payment, then the borrower will receive this modification. If this modification is insufficient to reach the target payment, then the loan is evaluated under the next step of the waterfall.
In the next step, the available Partial Claim is used to write down the amortizing principal balance to the extent necessary to reach the target payment. If the Partial Claim remaining is sufficient, then the remaining interest- bearing principal balance is amortized over 30 years at the Market Rate. This calculation results in a payment at the borrower’s target. If the remaining Partial Claim is insufficient, then the loan is evaluated under the last step of the waterfall.
The last step of the waterfall increases the monthly payment to an amount necessary to pay off the amortizing principal balance remaining after using the entire Partial Claim. FHA allows for a modification that creates a payment above the target, so long as it does not give the borrower a front-end DTI above 40%. DTI is calculated by dividing the borrower’s total monthly payment (including taxes, insurance, MIP, and condo/HOA fees) by the borrower’s gross monthly income. If a payment equal to 40% of the borrower’s gross monthly income is insufficient to cover the amortizing principal balance, then the borrower is not eligible for FHA-HAMP.
Tip
FHA analyzes a borrower’s expenses in great detail. The advocate should make sure to have a detailed and realistic budget that matches submitted documentation.