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"Utilizing alternatives to foreclosure is a positive action which benefits lenders homeowners and FHA.”
HUD Mortgagee Letter 96-25
In addition to the general options outlined above, there are a number of other programs available to you if your mortgage is FHA-insured.To qualify for any of these programs, the following criteria must be met:
- You must live in the property;
- The reason for the default must have been unavoidable, involuntary or beyond your control. Examples include loss of
a spouse, loss of a job, divorce or an extended illness;
- Usually, the reason for the default must be over and you must be able once again to make your regular monthly mortgage
payment.
To apply for any of these programs, you must call your lender and request a HUD financial package. Be specific about the type of workout that you are applying for. Be prepared to send your mortgage company the following:
- The completed package with financial information on each person that is on the mortgage;
- A financial statement showing income and expenses;
- A hardship letter explaining the reason for the default;
- 2 years tax returns;
- 2 months bank statements;
- 2 months of pay stubs or other proof of current income.
- Partial Claim Payment:
This program is designed for homeowners who suffered a temporary period of financial hardship that is now over. You must be able to once again make your regular monthly mortgage payment. If so, under this program, HUD pays your lender the amount owed to bring your loan current. You then begin making your regular monthly mortgage payment. HUD records another mortgage against the property for the amount that they paid your lender. You do not have to pay the Partial Claim mortgage until ownership of the house changes hands or the first mortgage is paid. Other points about the Partial Claim Program:
- Your loan must be between 4 and 12 months behind and not in foreclosure. If you are in foreclosure, offer to pay the attorneys costs and fees.
- Your income to debt ratio must be between 29% and 50%. In other words, if the financial hardship is not over, you will not qualify for this program.
- The amount of the Partial Claim mortgage cannot be more that 12 monthly payments.
- There is no interest on the Partial Claim mortgage.
- You can apply for the Partial Claim Program even if you are in a Chapter 13 bankruptcy.
- Special Forbearance:
A special forbearance involves changing your monthly payment. You can be considered for
it if the default was caused by a involuntary reduction in income or an increase in living expenses and there is a reasonable chance that you can bring the loan current under the plan. Other points about the Special Forbearance Program:
- Your loan must be between 4 and 7 months behind.
- The special forbearance usually involves a reduction or suspension in the amount of your monthly payment.
- There is no limit on the length of the special forbearance but you must start making your lull monthly payment again within 18 months of the default.
- The special forbearance must be in writing.
- Streamline Refinance:
This program allows your lender torefinance your loan if it is no more than 2 months delinquent at the time of the refinance. Your lender makes 1 monthly payment and the balance owed, including closing costs, is added into the new loan amount. What is streamlined about the process is the application and loan approval since your lender already has much of the information in your file to evaluate this option. A streamline refinance can possibly lower your interest rate and reduce your monthly mortgage payment. It should be considered after a special forbearance and before a mortgage modification.
- Mortgage Modifications:
In the past, certain regulations made loan modifications on FHA-insured loans a rarity. As of July 1, 1996 the rules were relaxed which now allows for greater use of this tool. Although a mortgage may be modified in many ways, the most common are: 1) a reduction of the interest rate or changing an adjustable rate to a fixed rate, or 2) an extension of the term of the mortgage or 3) adding the arrearage to the principal balance. Other points about the Mortgage Modification program:
- The new unpaid principal balance may be more than the old unpaid principal balance.
- The new unpaid principal balance can only include the amount of the unpaid monthly payments. You will have to pay any advances by your lender, such as the foreclosure costs and fees.
- Pre-Foreclosure Sale:
If you meet certain criteria, HUD will allow you to sell your home even if more is owed on the loan than the house is worth. To qualify, the appraised value of the house must be at least 700/0 of the unpaid principal balance, you must sell the house for at least 95% of the appraised value and HUD must receive at least 87% of the appraised value to payoff the loan. Refer to Chapter Three for more information on Pre-Foreclosure Sales.
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