Partial Claim Loans for Overdue Mortgage Payments
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The U.S. Department of Housing and Urban Development (HUD) may have programs to help if you have an FHA-insured mortgage and you're having trouble making your mortgage payments. In this article, we’ll talk about HUD’s programs for homeowners who are behind on their mortgage payments because of a job loss or COVID-related financial hardship. If you qualify for one of these programs, you may be able to save your home and prevent foreclosure.
Written by Attorney Tori Bramble.
Updated December 14, 2021
If you’re a homeowner and you’re having trouble making your mortgage payments, the U.S. Department of Housing and Urban Development (HUD) may have programs to help. HUD’s programs are designed to help people who have government-backed FHA loans avoid foreclosure. In this article, we’ll talk about HUD’s programs for homeowners who are behind on their mortgage payments because of a job loss or COVID-related financial hardship. If you qualify for one of these programs, you may be able to save your home and prevent foreclosure.
What Happens When Homeowners Get Behind on Their Mortgage Payments
If you fall behind on your mortgage payments, your mortgage company will give you a deadline to make up your missed payments so you can avoid foreclosure. If you’re unable to make up the missed payments or come to another agreement with your lender, the mortgage company can foreclose on your home. In a foreclosure, the bank or mortgage company takes your home back and sells it to recoup its costs. Your mortgage lender or loan servicer has the legal right to do this because a mortgage creates a lien on the property, which allows the lender to repossess it if you keep the loan current.
There are two types of foreclosure — judicial foreclosure and nonjudicial foreclosure by sale. A judicial foreclosure is a legal action that happens when a property with a mortgage on it is sold with court permission. But a homeowner will have the chance to defend a judicial foreclosure in court to prevent it. While both kinds of foreclosure are available in every state, in some states the only way a bank can foreclose on a property is with a judicial foreclosure. Because lenders aren’t required to go through the court system in a nonjudicial foreclosure, this process is often much faster.
HUD Programs To Avoid Foreclosure
HUD has teamed up with the Federal Housing Administration (FHA) to give homeowners expanded loss mitigation options. These are programs to help FHA-insured delinquent homeowners catch up on payments and avoid foreclosure. The FHA uses a “waterfall method” to determine a homeowner’s eligibility to catch up on back payments if they don’t qualify for a COVID-19 National Emergency Standalone Partial Claim. We’ll discuss the partial claim process later.
With the waterfall process, the FHA filters out homeowners who don’t qualify under the COVID-19 standalone partial claim and moves them along a waterfall of options. The goal is for mortgage servicers to get a new mortgage payment for borrowers that they can keep up with.
Specific HUD programs that can help some homeowners stay in their property are a loan modification, forbearance agreement, repayment plan, and partial claim options. These programs have certain requirements. Don’t assume you can’t qualify without first considering seeking professional advice from a HUD counselor and learning about your options. You can also think about contacting your lender. No matter which option you choose, it’s better to seek help to deal with a foreclosure than to ignore it.
If you can't keep up with your mortgage payments and want to keep your home, consider looking into a mortgage forbearance agreement. With a forbearance agreement, you and your lender could agree to temporarily reduce or suspend your mortgage payments. After the agreement period ends, your regular mortgage payments will resume.
With a mortgage repayment plan, a borrower experiencing a short-term financial hardship can ask for extra time to repay their mortgage loan. Usually, repayment plans are available to people that are ineligible for other loss mitigation options or who don’t want to refinance their original loan. With this plan, borrowers that are behind on a few months of mortgage payments can get their account in good standing over a relatively short time.
If you’re financially challenged and can’t make your monthly payments under the existing terms of your loan, you can ask for a loan modification. With a loan modification, you change the original terms of your mortgage by reducing your mortgage interest rate or extending your loan term. This can help reduce your monthly payment.
You can go through the mortgage loan modification process on your own or get help from a reputable company. But beware of scams. Also, the process can take time since your lender must evaluate your financial situation.
A partial claim is a federally backed interest-free loan from HUD that homeowners can use to make their mortgage current and avoid foreclosure. The HUD partial claim program pays the homeowner’s past-due mortgage payments to the lender to avoid foreclosure. The funds come from FHA mortgage premiums.
Partial claims are secured by HUD through zero-interest promissory notes. A promissory note is a written promise to pay back a debt. A partial claim can pay up to 30% of your existing mortgage’s unpaid principal balance. If you sell or refinance your house after a partial claim is granted, you’ll be required to repay the partial claim.
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Eligibility Requirements for Partial Claim Loans
A partial claim loan is only available for consumers who can't resume making their existing monthly mortgage payments. Mortgage servicers can evaluate borrowers for a standalone partial claim. To be eligible for a partial claim the borrower-homeowner must:
Be between 4-12 months behind on their mortgage payment.
Show they have enough income to make their regular monthly mortgage payments.
Live in the property (owner-occupied).
So it’s a good idea to contact your lender to discuss your delinquent mortgage payments. If you don’t ask your lender what options you have, you could lose your property. You should also know that HUD can advance your lender up to 12 months of mortgage payments (including the principal, interest, taxes, and insurance) through the partial claim program.
It’s important to get all of your financial paperwork together, including proof of your income, a financial hardship budget, debts, and bank statements to show your lender. This will give them the information they need to look closely at your financial situation and decide if you qualify for a partial claim. And if your lender asks you to provide additional paperwork to evaluate your request, it’s best to provide it to them promptly.
What Is a COVID-19 Partial Standalone Claim?
The FHA offers a COVID-19 National Emergency Standalone Partial Claim to help homeowners affected by the pandemic. This option is only available for homeowners whose mortgages were current or less than 30 days past due as of March 1, 2020.
The COVID-19 Partial Standalone Claim isn’t the same thing as the HUD partial claim. The COVID-19 National Emergency Standalone Partial Claim is limited to 25% of a borrower's unpaid principal balance. It combines all a borrower’s delinquent mortgage amounts and places them in a separate, junior lien of up to 25% of the mortgage’s outstanding principal balance. The junior lien only has to be repaid when the home is sold or is refinanced.
To qualify for the COVID-19 Standalone Partial Claim, borrowers must be able to show the FHA that they’re able to resume making on-time mortgage payments. This requires submitting your income and budget information to the FHA so it can determine your eligibility for this relief. If the borrower qualifies under this program and lives in the property, this loan will modify the rate and terms of the existing mortgage.
If you’re behind on your mortgage payments and don’t qualify for the other programs we discussed earlier in the article or the COVID-19 Standalone Partial Claim there are still ways to save your home. If you don’t qualify under the COVID-19 Standalone Partial Claim, the FHA will see if you’re eligible for mortgage relief under a COVID-19 Owner-Occupant Loan Modification.
And if an individual is ineligible for either program, they may qualify for the COVID-19 Combination Partial Claim and Loan Modification. This loan modification allows for a partial claim of up to 30% of the unpaid principal balance. Any remaining past-due balance owed is tacked on to the loan through a mortgage modification.
Lastly, a COVID-19 FHA HAMP Combination Loan Modification and Partial Claim is available to homeowners who are ineligible for any of the partial claims and loan modification programs we’ve discussed above.
Fortunately, HUD and the FHA have mortgage payment relief options in place for homeowners with FHA-insured mortgages who are experiencing financial difficulties, especially in light of the COVID-19 National Emergency.
If you can’t pay your mortgage payments, act now before it's too late. You may have options to save your home from foreclosure. Mortgage servicers backed by the FHA and the government must extend deferred or reduced mortgage payment options to help borrowers in financial crises. Be sure to speak with a qualified housing counselor to find out what affordable modification options are available in your situation.