FHA Borrowers Now Eligible for Loan Modification Programs

The Federal Housing Administration (FHA) this morning announced another addition to its programs designed to assist homeowners in danger of losing their homes to foreclosure.

Department of Housing and Urban Development (HUD) Secretary Shaun Donovan released new guidelines for the Federal Housing Administration's (FHA) Affordable Modification Program to bring it into compliance with The Helping Families Save Their Homes Act of 2009 signed by President Obama in May.

Under the new guidelines, which will go into affect on August 15, current FHA borrowers will now be able to permanently reduce their monthly mortgage payments if they seek and receive a modification from their current mortgage company or loan servicer. Previously, only borrowers whose loan was owned by Fannie Mae or Freddie Mac were eligible for the Obama Administration's loan modification programs. The new guidelines are in addition to changes announced earlier this month to assist borrowers with negative equity as high as 125 percent loan to value.

The new modification guidelines will utilize a partial claim option.  FHA has used this partial claim mechanism in the past to allow servicers to advance funds to bring a delinquent mortgage current.  Now those funds can also be used to lower the monthly payment to an affordable level by reducing the outstanding principal balance of the loan by as much as 30 percent and recalculating payments based on that new amount.  These advanced funds are not gifts and the portion of the balance affected will be deferred not written off.   Repayment of the deferred amount will begin when the first mortgage is paid off.  HUD is, in effect, merely extending the term of the loan beyond the usual 30 years.

In a HUD press release Secretary Donovan said, "Today, we're bringing another important tool to the table to help struggling families who are desperate to keep their homes. Tens of thousands of FHA borrowers will now be able to modify their mortgages in the same manner as s many others who are taking advantage of the Administration’s Making Home Affordable program. This is just the latest tool we are providing to help homeowners prevent foreclosures through the Making Home Affordable program. Earlier this month we announced an expansion of the Home Affordable Refinance Program to borrowers who are up to 125 percent underwater. Together, these actions will significantly increase the help available to homeowners."

To qualify for the modification, a borrower must provide the usual documents detailing his financial situation and attesting to a hardship.  His front end ratio (ratio of housing expenses to income) must be “as close as possible to but not less than 31 percent” and the total ratio of recurring debt to income must not exceed 55 percent.  In addition the borrower must prove he is capable of making the new payments by entering into a three month trial period at the new payment level.  If any of the three monthly payments are not made in a timely manner the borrower will lose any eligibility for the modification.READ MORE ON GUIDELINES

FHA borrowers who wish to learn more about the program should contact their mortgage servicer or call HUD’s National Servicing Center at (888)297-8685.

FHA will pay an incentive to loan servicers for each loan they process and modify under the new guidelines.