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FHA Loan Modification Rule Changes

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Borrowers who get into financial difficulty and have trouble making payments on their FHA home loans have some options with the FHA that can help the borrower avoid foreclosure. The FHA has updated its rules to home loan modifications and other foreclosure avoidance procedures–those updates are found in FHA Mortgagee Letter 13-32. We recently discussed some of the initial changes, which the FHA has given lenders until December 2013 to make.

That recent update includes some instructions to the lender regarding loan forbearance.

“Before a mortgagee considers a delinquent mortgagor for one of FHA’s Loss Mitigation Home Retention Options, the mortgagee must first evaluate the mortgagor for both Informal and Formal Forbearance Plans…Informal and Formal Forbearance Plans are the only options available for delinquent mortgagors without verifiable losses of income or increases in living expenses.”

FHA ML 13-32 continues, stating:

  • Forbearance Plans are arrangements between a mortgagee and mortgagor that may allow for a period of reduced or suspended payments and may provide specific terms for repayment, depending on the circumstances.
  • Informal Forbearance Plans are oral agreements relating to a period of three months or less. (See Mortgagee Letter 2000-05).
  • Informal and Formal Forbearances are ineligible for loss mitigation incentive payments.
  • Formal Forbearance plans are written agreements with a period of greater than three months but, not more than six months. If the mortgagee determines that 85 percent of the mortgagor’s surplus income is sufficient to bring the mortgage current within six months, the only available loss mitigation option is a Formal Forbearance plan that provides for repayment within the six months…

After evaluating a delinquent FHA borrower “for Informal and Formal Forbearance Plans” the mortgagee letter says, the lender must review FHA’s Loss Mitigation Home Retention Options in a specific order of precedence. The borrower may be given options in the following descending order starting with Special Forbearances, the moving to Loan Modifications, or FHA-HAMP.

The mortgagee letter adds, “Before four full monthly installments due on the mortgage are unpaid, the mortgagee must evaluate a mortgagor’s financial situation on a monthly basis to determine the appropriate Loss Mitigation option when the mortgage is in default or imminent default.”

For more information on these options, discuss your needs with a lender or contact the FHA directly at 1-800 CALL FHA.

Do you have questions about FHA home loans? Ask us in the comments section.

Joe Wallace - Staff Writer

By Joe Wallace

September 25, 2013

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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