Loan modification can provide much-needed financial relief for homeowners with FHA-insured mortgages who are struggling to make their monthly payments. With the economic impacts of COVID-19, loan modification has become an essential tool for many homeowners to avoid foreclosure. In this comprehensive guide, we’ll explain everything you need to know about the loan modification process for FHA loans, the types of modifications available, eligibility requirements, and how to apply.
What is an FHA Loan Modification?
An FHA loan modification is when the terms of the original mortgage agreement are changed to make the monthly payments more affordable for the borrower. The lender agrees to modify one or more terms of the mortgage contract, such as:
- Extending the repayment period
- Lowering the interest rate
- Adding missed payments to the loan balance
- Reducing the monthly payment amount
The goal is to create a new payment plan that the homeowner can manage based on their current financial situation. FHA modifications can provide immediate relief and allow homeowners to avoid foreclosure.
FHA COVID-19 Recovery Options
In response to the COVID-19 pandemic FHA has expanded loss mitigation options for borrowers impacted by the economic crisis. These COVID-19 recovery options are available through April 30, 2025 and include
- Forbearance – Pause or reduction in mortgage payments for unemployed borrowers.
- Standalone Partial Claim – Missed payments are deferred as a no-interest subordinate lien.
- Loan Modification – Extends term to 30/40 years, capitalizes arrears, targets 25%+ payment reduction.
- Pre-Foreclosure Sale – Servicer accepts less than full amount owed.
- Deed-in-Lieu of Foreclosure – Borrower voluntarily gives the property back.
FHA also allows use of Homeowner Assistance Funds in combination with loss mitigation options
FHA Loan Modification Eligibility
To qualify for an FHA loan modification the borrower must meet certain criteria
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FHA-insured mortgage – Loan must be insured by FHA. Modifications are available for forward mortgages and reverse mortgages (HECM).
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Owner-occupied property – For forward mortgages, property must be borrower’s primary residence.
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Financial hardship – Borrower must be unable to make mortgage payments due to circumstances outside their control. Hardships like job loss, income reduction, divorce, medical expenses, disability can qualify.
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Delinquency – Borrower must be at least 30 days late on payments to apply. The further behind, the better the modification options.
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Affordability – Modified payment must be affordable and reduce default risk based on income documentation.
As long as these requirements are met, the servicer is required to evaluate the borrower for a loan modification.
How to Apply for FHA Loan Modification
Here are the steps for FHA borrowers to apply for a mortgage loan modification:
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Contact your servicer – Immediately call your servicer if you are struggling to make payments. Notify them of your hardship.
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Submit documentation – Provide income verification and hardship documentation as required. This can include pay stubs, bank statements, medical bills, etc.
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Complete trial period – Make 3-4 modified payments on time to demonstrate you can manage the new payment.
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Receive modification agreement – After successfully completing the trial, you’ll get a permanent modification agreement.
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Accept offer – Review, sign, and return the final loan modification contract.
Your servicer is required to assess modification options within 30 days of initial contact. Move quickly and provide all required documents to speed up the process.
Types of FHA Loan Modifications
FHA offers several loan modification programs to help homeowners become current on payments and avoid foreclosure:
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FHA-HAMP – Adds missed payments to loan balance, extends term to 480 months, and reduces interest rate to current market rate.
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Disaster Modifications – Special options for borrowers in Presidentially-Declared Major Disaster Areas to receive forbearance followed by permanent modifications.
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Streamline Modifications – For borrowers who defaulted after successfully making payments on a previous mod.
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COVID-19 Recovery Options – Extended options including 40-year term modifications, standalone partial claims, and principal reductions.
Loan modifications can vary based on your specific situation. Your servicer will determine the modification for which you qualify that best resolves the delinquency and retains homeownership.
Benefits of FHA Loan Modification
Some key benefits of completing an FHA loan modification include:
- Making payments more affordable based on your household income.
- Avoiding foreclosure and remaining in your home.
- Becoming current on your mortgage if you were delinquent.
- Fixing a long-term hardship with a permanent sustainable payment solution.
- Benefiting your credit by continuing to make on-time payments.
- Building equity as you pay down the modified mortgage balance.
Alternatives to Loan Modification
If you don’t qualify for an FHA modification, some alternatives to discuss with your servicer include:
- Forbearance – Temporarily reduced or suspended payments.
- Repayment plan – Allows you to repay the arrearage over time.
- Partial claim – Uses FHA insurance fund to cover arrears in no-interest subordinate lien.
- Pre-foreclosure sale – Sell the property to avoid foreclosure and satisfy the debt.
- Deed-in-lieu of foreclosure – Voluntarily transfer ownership of the property to the servicer.
Be sure to fully explore all options before choosing alternatives like bankruptcy or letting the home go into foreclosure.
The Takeaway
- An FHA loan modification adjusts your mortgage terms to make payments affordable.
- COVID-19 recovery options provide expanded relief including up to 40-year terms.
- To qualify, you must have an FHA loan, be owner-occupied, prove hardship, and show affordability.
- Work closely with your servicer to submit documents and complete a trial period.
- Loan mods allow homeowners to avoid foreclosure and retain homeownership.
If you have an FHA mortgage and are struggling due to financial hardship, contact your servicer immediately to discuss modification options. With the help of an FHA mod, you can get your payments under control and stay in your home.
Frequency of Entities:
COVID-19: 5
FHA: 14
loan: 7
modification: 11
mortgage: 8
payments: 6
borrower: 5
servicer: 5
foreclosure: 4
options: 4
homeowner: 3
affordable: 3
arrears: 2
balance: 2
interest: 2
term: 2
financial: 2
hardship: 2
COVID-19 Loss Mitigation for Home Equity Conversion Mortgage (HECM) Borrowers
- COVID-19 HECM Property Charge Repayment Plan: The COVID-19 HECM Property Charge Repayment Plan allows servicers to offer eligible homeowners up to five years (60 months) to repay property charges advanced by the servicer. This additional time to repay delinquent property charges will increase the likelihood that affected borrowers can cure property charge delinquencies and avoid foreclosure.
- Allows the COVID-19 HECM Repayment Plan regardless of whether the borrower has been unsuccessful on a prior repayment plan and whether the borrower owes more than $5,000 in property charge advances; and
- Only requires a verbal attestation from the borrower that they have been impacted by COVID-19.
- This option is also available to borrowers who have applied for Homeowner Assistance Fund (HAF) assistance if the HAF funds combined with the borrowers ability to repay will satisfy the servicers advances for the delinquent property charges.
- COVID-19 HECM Property Charge Repayment Plans must be initiated one year following the expiration of the COVID-19 National Emergency.
The American Rescue Plan Act of 2021 established the Homeowner Assistance Fund (HAF) in the U.S. Department of the Treasury in order to provide financial assistance to eligible homeowners who have suffered financial hardships during the COVID-19 National Emergency.
Qualified expenses may include mortgage payment assistance, mortgage reinstatement, utilities, insurance, and other housing-related costs.
If permissible by your states HAF program, HAF Funds may be used in combination with FHAs COVID-19 Loss Mitigation Options for single family forward mortgages and may also be utilized to reduce the balance or pay off the borrowers outstanding loss mitigation Partial Claims, including for borrowers whose mortgage payments are now current.
HAF may also be used in combination with the COVID-19 HECM Property Charge Repayment Plan. FHA also permits the application of HAF to pay for delinquent property tax and homeowners insurance charges on defaulted HECMs.
More information about HAF can be found at: https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-governments/homeowner-assistance-fund
HAF information by state can be found at: https://www.ncsha.org/homeowner-assistance-fund/
HUDs FAQs on HAF in connection with FHA Loss Mitigation can be found at: https://www.hud.gov/answers by selecting the HUD NSC Servicing link on the left side, and then selecting Treasury Homeowner Assistance Fund (HAF) Program.
COVID-19 Recovery Loss Mitigation Options
The COVID-19 Recovery Loss Mitigation Options provide borrowers with options to bring their Mortgage current and may reduce the P&I portion of their monthly mortgage payment to reduce the risk of re-default and assist in the broader COVID-19 recovery. FHA offers COVID-19 Recovery Options to borrowers who are 61 days or more delinquent through April 30, 2025. Non-Borrowers who acquired title through an exempted transfer are not eligible for the COVID-19 Recovery Options and must be evaluated for FHAs Standard Loss Mitigation Options.
COVID-19 Recovery Home Retention Options:
- COVID-19 Recovery Standalone Partial Claim: For borrowers who can resume making their current mortgage payments, the COVID-19 Recovery Standalone Partial Claim allows mortgage payment arrearages to be placed in a zero interest subordinate lien against the property. The Partial Claim amount does not require payment until the last mortgage payment is made, the loan is refinanced, or the property is sold, whichever occurs first.
- COVID-19 Recovery Modification: For borrowers who cannot resume making their current monthly mortgage payments, the COVID-19 Recovery Modification resolves the outstanding mortgage payment arrearages by adding it to the principal loan balance of the first mortgage, extending the term to 30 or 40 years at the current fixed market interest rate, and targets reducing the borrowers monthly principal and interest portion of their monthly mortgage payment. The COVID-19 Recovery Modification must include a Partial Claim if the borrower has Partial Claim funds available.
- Payment Supplement: For borrowers who cannot achieve a payment reduction through a COVID-19 Recovery Modification, the Payment Supplement utilizes Partial Claim funds to resolve the outstanding mortgage payment arrearages and provides a monthly principal reduction payment. This option temporarily reduces the borrowers monthly mortgage payment for a period of three years. The Payment Supplement may be available to borrowers beginning May 1, 2024, but must be available to all eligible borrowers no later than January 1, 2025. Borrowers may inquire about the availability of the Payment Supplement with their mortgage Servicer.
- COVID-19 Pre-Foreclosure Sale (PFS): If the borrower does not qualify for any of the COVID-19 Home Retention Options and the property sales value is not enough to pay the loan in full, the servicer may be able to accept less than the full amount owed by approving eligible borrowers for a Pre-Foreclosure Sale, also known as a short sale.
- COVID-19 Deed-in-Lieu (DIL) of Foreclosure: If the borrower is unable to complete a COVID-19 PFS transaction at the expiration of the PFS marketing period, they may be able to voluntarily offer to deed (“give back”) the property to HUD in exchange for a release from all obligations under the Mortgage.
New FHA Loan Modification. Reduce Payment by 25%. Stop Foreclosure!
FAQ
Can you do a loan modification on a FHA loan?
What are the rules for loan modification?
What is the 40 year loan modification for FHA?
What is the waiting period for a FHA loan modification?
What is the new FHA loan modification rule?
The rule also aligns FHA’s requirements with loan modification options available to mortgagees for borrowers with mortgages backed by Fannie Mae and Freddie Mac, which provide a 40-year loan modification option. The regulations in this final rule are effective on May 8, 2023.
What are the options for an FHA loan modification?
For an FHA loan modification, there are two options: an interest-free loan for up to 30 percent of your balance, and a 40-year loan extension as of May 2023. The U.S. Department of Housing and Urban Development made the 40-year loan extension rule effective.
Does FHA have a 40-year loan modification?
The provisions of the final rule will expand FHA’s loss mitigation options to include a standalone 40-year loan modification. The 40-year loan modification can assist borrowers in avoiding foreclosure by spreading the outstanding mortgage balance over a longer period, thereby making their monthly payments more affordable.
What is a mortgage modification?
A mortgage modification changes the loan’s rate or term (or both) to make monthly payments more affordable for borrowers who can’t afford their current mortgage payments. To get a modification, they must provide proof of hardship to their mortgage lender or servicer. Modifications are a long-term financial relief option for homeowners.