When a borrower applies for an FHA mortgage, experiencing financial trouble isn’t top-of-mind; qualifying for the loan, making the down payment, and moving in are likely the big issues most think about when applying. But financial difficulties can and sometimes do come, so what can a borrower do if he or she finds themselves unemployed after purchasing a home with an FHA mortgage?
FHA loan rules in HUD 4000.1 do permit the lender to offer something known as “special forbearance” or SFB for unemployed borrowers who are in danger of missing payments, going into loan default, etc.
“The SFB-Unemployment Agreement is a written agreement between a Mortgagee and the Borrowers, one or more of whom has become unemployed, allowing for reduced and/or suspended Mortgage Payments.” This is an arrangement negotiated between the borrower and lender, the FHA itself has nothing to do with the arrangements made except to provide instructions to the lender about what is permissible under the FHA program.
“The Mortgagee must prepare an SFB-Unemployment Agreement that provides for the following:
-a minimum of 12 months for re-employment;
-identifies the specific months for which the account is Delinquent and notes the total arrearage that accrued prior to the beginning of the Agreement;
-suspends and/or reduces the current monthly Mortgage Payment;
-ensures that the forbearance payment installments required under the terms of the agreement are based on the Borrowers ability to pay;
-does not allow late fees to be assessed while the Borrower is performing under the terms of the SFB-Unemployment Agreement;
-should the Borrowers financial circumstances change, the Mortgagee may adjust the monthly payment based on an evaluation of the Borrowers new financial information;
-does not allow the accrued arrearage to exceed the equivalent of 12 months Delinquent Principal, Interest, Taxes, and Insurance (PITI) (the 12 months of PITI for Adjustable Rate Mortgages (ARM), Graduated Payment Mortgages (GPM), and Growing Equity Mortgages (GEM) will be calculated by multiplying 12 times the monthly payments due on the date of Default); and
-allows the Borrower to pre-pay the mortgage delinquency at any time.”
HUD 4000.1 adds that such an agreement will “not include terms for reinstatement because the Mortgagee must re-evaluate the Borrower for more permanent Loss Mitigation Options to cure a Default once the Borrower acquires employment and/or the SFB-Unemployment Agreement expires”.
Notice the protections for the borrower, such as the ability to pre-pay the mortgage delinquency at any time. FHA home loans in general do not permit penalties for early payoff of the loan, and this requirement seems to be in the same spirit of that protection. The borrower may be asking the lender for a “favor” by entering the SFB, but the lender is not permitted to penalize the borrower for activities such as pre-paying the delinquency.
It’s never easy to acknowledge financial hardship, but it’s important to remember that the sooner a borrower acts in situations where their ability to pay an FHA mortgage payment, the more options the borrower has to save their home and prevent loan default/foreclosure.