FHA Loan Modification Trial Payment Plans-What If The Borrower Fails?

Recently the FHA changed some of its policies related to loss mitigation and foreclosure avoidance on FHA guaranteed home loans. In our last look at these changes, we examine what the latest guidance from the FHA and HUD has to say about borrowers in financial difficulty who cannot or do not successfully navigate a Trial Payment Plan.

Borrowers and lenders are advised in Mortgagee Letter 13-32, “If a mortgagor fails to successfully complete a Trial Payment Plan under a Loan Modification or FHA-HAMP, pursuant to 24 C.F.R. § 203.355, mortgagees must still re-evaluate the mortgagor’s eligibility for other appropriate Loss Mitigation Options. If the mortgagor’s circumstances have not changed, the mortgagee must evaluate the mortgagor for FHA Loss Mitigation Home Disposition Options prior to initiating foreclosure.”

While the Trial Payment Plan is not the final option according to that paragraph, borrowers should take the Trial Payment Plan very seriously as it in and of itself may help the borrower avoid further financial complications. But in some cases, there may be complications that seem to have no resolution in sight for the borrower.

In these circumstances, the latest FHA guidance states, “If the cause of default is incurable (i.e., the mortgagor has no realistic opportunity of replacing his/her lost income or reducing his/her expenses enough to meet the mortgage obligation), Home Disposition Options are readily available for use upon default.”

Furthermore, FHA Mortgagee Letter 13-32 adds, “A mortgagor who did not succeed in completing a Trial Payment Plan is eligible to reapply for assistance and begin a second Trial Payment Plan only if his/her financial circumstances have changed since the last application for assistance.”

The new guidance requires borrowers to supply their loan officers with, “verifiable documentation supporting the change in their financial circumstances. Changes in employment must be verified by paystubs or by a Verification of Employment as described in HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance on One- to-Four Unit Mortgage Loans.”

And finally, for borrowers in bankruptcy proceedings, it’s important to point out that ML 13-32 states, “Mortgagors with an active Chapter 7 or Chapter 13 bankruptcy case are eligible for FHA Loss Mitigation Options to the extent that such Loss Mitigation does not violate federal bankruptcy law or orders of the Bankruptcy Court or Bankruptcy Trustee. In addition, mortgagors who have received a Chapter 7 bankruptcy discharge and failed to reaffirm the FHA-insured mortgage debt under applicable law are eligible to be considered for Loss Mitigation Options.”

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