Authored By: U.S. Department of Housing & Urban Development
In cases of mortgage default, the client has the following options in order to avoid foreclosure:
- Special Forbearance
- Mortgage Modification
- Partial Claim
- Pre-Foreclosure Sale
- Deed-In-Lieu of Foreclosure
- Chapter 13 Bankruptcy
A Special Forbearance Agreement is an agreement between the mortgagor and mortgagee to repay past due payments within a structured period of time.
A client who is behind in his or her mortgage payments should call or write the lender and explain his or her economic situation. The lender can set up a repayment plan based upon the client's finances and may even temporarily reduce or suspend the mortgage payments.
The eligibility requirements for a Special Forbearance Agreement are:
- The owner must be occupying the home.
- The mortgagee must have experienced a reduction in income or an increase in expenses.
- The mortgagee must have the ability to pay the terms of the forbearance agreement.
Several other significant facts regarding Special Forbearance Agreement are:
- They can be executed no earlier than the 4th missed payment (91 days) and no later than the 7th missed payment.
- The delinquency is not to exceed the equivalent of 12 months of Principal, Interest, Taxes and Insurance (PITI).
- There is no restriction as to the length of the Special Forbearance Agreement.
- Special Forbearance Agreements may not include late charges or foreclosure costs.
- There is a $100 incentive to the Mortgagee for each forbearance agreement executed.
- Lenders in the top 25% receive $200.
If a mortgagee is behind in his or her payments, he or she should locate a lender that will refinance the mortgage loan. This may lower the monthly payments to a more manageable level.
The borrower requirements for a mortgage modifications are:
- The borrower is unable to reinstate or use a forbearance agreement to bring the debt current.
- The borrower does not have another FHA-insured mortgage.
- The borrower must occupy the house.
Several notable facts about mortgage modifications are:
- The interest rate may be reduced, but may not be increased.
- Only one borrower's signature is required unless state law requires otherwise.
- The term may be extended up to 10 years past the original maturity date.
- The mortgagee must maintain the first lien status of the mortgage.
- Administrative costs, late charges, and legal fees cannot be included.
- FHA will pay lenders $500 per case for administrative processing expenses and up to $250 for a title search.
A mortgagee who is in default should ask his or her lender to work with him or her to get an interest-free loan from HUD to bring his or her payments up to date. He or she will qualify if: (1) his or her loan is 4 to 12 months delinquent, (2) the mortgage is not in foreclosure; and (3) he or she if financially ready to begin making full mortgage payments.
Partial claims may be used after determining that the homeowner doesn't qualify for a special forbearance or mortgage modification.
Partial claims can be used as a stand alone tool, or in conjunction with a special forbearance to bring the delinquency down to 12 months principal, interest, taxes and insurance.
The eligibility requirements for a partial Claim are:
- The home must be owner occupied.
- Partial claims may be executed no earlier than the 4th missed payment.
- Income verification is required.
- The mortgagee must meet debt/income ratio (unless HUD approves a variance).
- A credit report is required.
- The claim cannot exceed the equivalent of 12 months PITI.
- Only one borrower's signature is required if the transfer of title is legally executed and filed of record.
- The transaction must comply with State law.
Several notable facts about partial claim are:
- The lender must not file more than one partial claim on each loan with 3 years.
- Mortgagors must return to a full mortgage payment at the time the claim is filed.
- Any junior lien must be in the name of the Secretary of HUD.
- There is no requirement that it must be in 2nd position.
- Foreclosure costs and late charges may not be include.
- HUD will pay an administrative fee of $250.00 for processing a partial claim. No additional costs or fees will be paid by HUD.
A mortgagee who is in default may sell the property and pay off his mortgage loan. This will help him to avoid foreclosure and further damage to his credit rating.
The eligibility requirements for a pre-foreclosure sale are:
- The residence must be owner occupied. (Houses that are rented out or vacant are considered on a case by case basis).
- The loan must be at least two months (32 days) delinquent at the time of closing
- This must be an arms length transaction.
- The ration of "as is" value to outstanding debt has to be at least 70%. (It can very to 63% with HUD approval).
- The gross sales price must be at least 95% of the "as is" appraised value.
- The ratio of estimated net sales proceeds to "as is" appraised value must be at least 87%. (It can vary to 82% with HUD approval).
- The mortgagee must be without the resources to bring the debt current.
- Foreclosure must be inevitable.
The procedures in a pre-foreclosure sale are as follows:
- The lender must notify the borrower that he has an option to conduct a pre-foreclosure sale.
- The borrower then elects to participate.
- The lender orders an "as-is" appraisal.
- Upon approval to participate in a pre-foreclosure sale, the borrower selects a broker within 7 days and the lender delays the foreclosure.
- During the close out, the mortgagee must obtain a signed contract within 3 months, beginning with the approval from the lender.
- They must close within 6 months.
- All legal owners must sign the agreement.
Net Sales Proceeds = Sales price minus:
- Sales commission (6% max.)
- Limited repairs (max 10% of as-is)
- Customary seller closing costs
- Amount of discharge liens ($1,000 max).
The incentives are as follows:
- Sellers receive $1,000 upon completion of PFS if closed within 1st 3 months (750 after).
- Lenders receive $1,000 upon completion pf PFS.
- Lenders in top 25% will receive an additional 2 months to market property.
A mortgagee in default can give back the property to the lender.
This will increase his chances of getting a mortgage loan in the future. A mortgagee should try this option if (1) he is in default and doesn't qualify for any of the other options; (2) doesn't have another mortgage in default; and (3) is unable to sell the house before foreclosure.
The eligibility requirements for a deed-in-lieu of foreclosure are:
- The mortgage must be in default.
- The property must be owner occupied. (This requirement may be varied on a case by case basis.)
- The borrower must not be qualified for any other loss mitigation tool.
- The lender must be able to obtain clear title.
- All legal owners must sign deeds.
- Junior liens must be paid off.
- The lender must execute and record legal instruments.
- The lender must convey property to HUD.
The incentives for a deed-in-lieu of foreclosure are:
The borrower may receive up to $500.00.
HUD will reimburse the lender up to:
- $250.00 for the cost of a title search
- $250.00 administrative fee upon successful completion
If the mortgagee is in default and cannot bring his arrearage current, he may be able to file a chapter 13 bankruptcy and stop any foreclosure procedures which may be pending. Filing a chapter 13 will allow the mortgagee to put his arrearage into a plan and pay it out over the life of the bankruptcy