FHA Single Family Housing Policy Handbook 4000.1, Part III — e. Loan Default and Loss Mitigation (05/09/2022)

FHA Single Family Housing Policy Handbook 4000.1, Part III — e. Loan Default and Loss Mitigation (05/09/2022)

e. Loan Default and Loss Mitigation (05/09/2022) As part of prudent and diligent loan servicing, HUD encourages Lenders to make a reasonable effort to assist delinquent Borrowers in bringing the Loan current prior to accelerating the Loan. For any loss mitigation strategy implemented, the Lender must determine that the Borrower is reasonably able to repay past arrearages and qualify based on the Approvable Qualifying Ratio. i. Contact with the Borrower Before taking action to accelerate the maturity of the Loan, the Lender or its agent must contact the Borrower and any co-maker or Co-signer, either in a face-to-face meeting or by telephone, to discuss the reasons for the Default and to seek its cure. If the Borrower and the co-makers or Co-signers cannot be located, will not discuss the Default, or will not agree to its cure, the Lender may proceed to take action. The Lender must document the results of its efforts to contact the Borrower and any co-maker or Co-signer. ii. Loss Mitigation Tools HUD encourages loss mitigation to help a delinquent Borrower return the Loan to good standing. The purpose of loss mitigation is to reduce HUD and Lender losses, and preserve insurance reserves. Listed below are the tools available to Lenders and Borrowers that can assist in bringing the Loan current. III. SERVICING AND LOSS MITIGATION C. Title I Insured Programs 1. Title I Property Improvement Loan Program Handbook 4000.1 1544 Last Revised: 11/26/2025 (A) Refinance A Loan that is in Default may be refinanced. There can be no “cash out” to the Borrower. The principal amount of the new Loan may not exceed the lesser of: 1) the cost to the Borrower of prepaying the existing Loan or 2) the original principal balance of the original Loan being refinanced. (B) Modification Agreement The Borrower may be considered for a Loan Modification if the Borrower has recently experienced an involuntary reduction in income or an unexpected increase in living expenses, and the Lender determines the Borrower has a reasonable ability to pay under the terms of the loan modification plan to eliminate the arrearage. A Lender may enter into a modification agreement with a Borrower without prior permission from HUD. A modification agreement: • requires a written agreement signed by the Borrower; • need not be recorded; • may increase or decrease the monthly payment amount; • cannot increase the interest rate or loan term; • cannot include new funds; and • does not require any further insurance reporting to HUD, but all documentation of the modification must be submitted if an insurance claim is filed. (C) Repayment Plan A repayment plan does not require a Borrower’s signed agreement. A Borrower may be eligible for a repayment plan if the Borrower has recently experienced an involuntary reduction in income or an unexpected increase in living expenses, and the Lender determines the Borrower has a reasonable ability to pay under the terms of the repayment plan. A Lender may enter into a repayment plan without HUD’s permission. A repayment plan: • must be evidenced by a copy of the Lender’s letter to the Borrower outlining the terms of the agreement; • cannot extend beyond six months; and • does not require any further insurance reporting to HUD. (D) Partial Payments (1) Definition A Partial Payment refers to a payment of any amount less than the full amount due on the Loan at the time the payment is tendered, including Late Charges and III. SERVICING AND LOSS MITIGATION C. Title I Insured Programs 1. Title I Property Improvement Loan Program Handbook 4000.1 1545 Last Revised: 11/26/2025 amounts advanced by the Lender on behalf of the Borrower (such as for the payment of taxes). (2) Standard The Lender may agree to accept a Partial Payment, thereby assisting a Borrower who is having a temporary problem making their Loan Payment. This practice will usually be advantageous for the Lender and HUD. Except as outlined below, a Lender must accept any Partial Payment and apply it to the Borrower’s account or hold it in a trust account pending disposition. When Partial Payments held for disposition aggregate a full monthly installment, they must be applied to the Borrower’s account, thus advancing the date of the oldest unpaid installment. If the Lender did not agree to accept Partial Payments, it must return a Partial Payment to the Borrower with a letter of explanation if any of the following apply: • The Loan is not in Default. • The payment represents less than half of the full amount then due. • The payment is less than the amount agreed to in a modification agreement or repayment plan. • The Lender has issued a Notice of Default and Acceleration. • The Loan has been Delinquent for six months. • The Loan has been chronically Delinquent (i.e. two or more instances where the account was Delinquent, brought current, and then reverted back to a Delinquent status). (E) Assumption If a Borrower cannot afford to continue to make Loan Payments and elects to sell the Property, the Lender may approve an assumption of the Loan. iii. Notice of Default and Acceleration The Lender must provide each Borrower with written notice that the Loan is in Default and that the loan maturity is to be accelerated. This notice must be sent when the Loan is at least 30 Days Delinquent but after the Lender has attempted to contact the Borrower. Exceptions to sending the notice include when the Borrower cures the Default, agrees to a modification agreement or repayment plan, or is in bankruptcy. The notice must be in a font size no smaller than the equivalent of Times New Roman Size 12 for the entire notice. In addition to complying with applicable state or local notice requirements, the notice must be sent by certified mail and must contain: III. SERVICING AND LOSS MITIGATION C. Title I Insured Programs 1. Title I Property Improvement Loan Program Handbook 4000.1 1546 Last Revised: 11/26/2025 • a description of the obligation or security interest held by the Lender; • a statement of the nature of the Default and of the amount due to the Lender as unpaid principal and earned interest on the Note as of the date 30 Days from the date of the notice; • a demand upon the Borrower either to cure the Default (by bringing the Loan current or by refinancing the Loan) or to agree to a modification agreement or a repayment plan, no later than the date 30 Days from the date of the notice; • a statement that if the Borrower fails either to cure the Default or to agree to a modification agreement or a repayment plan by the date accruing 30 Days from the date of the notice, then, as of the date 30 Days from the date of the notice, the maturity of the Loan is accelerated and full payment of all amounts due under the Loan is required; and • a statement that if the Default persists the Lender will report the Default to an appropriate credit reporting agency: This Loan is insured against nonpayment by the federal government. If you do not repay the Loan as agreed, we may assign the debt to the U.S. Department of Housing and Urban Development (HUD) for collection. If your Loan is assigned to HUD, your failure to pay the debt in accordance with the terms set by HUD may result in any or all of the following actions: • seizing your federal income tax refunds, Social Security benefit payments, federal employee wages or retirement, or other federal payments; • administrative garnishment of your wages if you are not a federal employee (which does not require a judgment and court order to implement); • referring the debt to the U.S. Department of Justice, U.S. Department of the Treasury, or to private collection agencies; and • making you liable for penalties and administrative costs that HUD may impose as authorized by Section 3717 to Title 31 of the United States Code (including collection fees charged by the Department of Justice, Department of Treasury or private collection agencies). iv. Notice to Credit Reporting Agency If the loan maturity is accelerated and the Loan is not reinstated, the Lender must report the Default to an appropriate credit reporting agency. v. Reinstatement of the Loan The Lender may rescind the acceleration of maturity after full payment is due and reinstate the Loan only if the Borrower brings the Loan current, executes a modification agreement, or agrees to an acceptable repayment plan. III. SERVICING AND LOSS MITIGATION C. Title I Insured Programs 1. Title I Property Improvement Loan Program Handbook 4000.1 1547 Last Revised: 11/26/2025 vi. Bankrupt or Deceased Borrower When a Lender becomes aware that a Borrower has filed bankruptcy or has died, the Lender must take prompt, effective action to protect the Lender’s interest as holder of the Loan. (A) Bankruptcy The Lender must file a proof of claim with the bankruptcy court, unless the court notifies the Lender that the Borrower has no assets. A proof of claim must be filed even if the Borrower is current on the Title I Loan. The Lender must verify that the proof of claim is filed, on time and without objection, and takes any other steps necessary to protect the Lender’s interest as holder of the Note. If the bankruptcy is closed, the Lender must have evidence of the bankruptcy discharge or dismissal. Documentation of these steps can be in the form of notices from the bankruptcy court, or other official records such as the Public Access to Court Electronic Records (PACER). (B) Deceased Borrower The Lender must confirm the death of a Borrower via a death certificate or other reasonable evidence. The Lender must determine if a probate proceeding exists and document its findings. If there is a probate proceeding, the Lender must file a timely proof of claim.

Source: FHA Single Family Housing Policy Handbook 4000.1, Part III — e. Loan Default and Loss Mitigation (05/09/2022) · source URL · snapshot 8c03836f77f317e1