FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Loss Mitigation Home Retention Options (12/30/2025)

FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Loss Mitigation Home Retention Options (12/30/2025)

i. Loss Mitigation Home Retention Options (12/30/2025) If the Mortgagee has sent out the final documents to the Borrower to complete a COVID-19 Advance Loan Modification (COVID-19 ALM), COVID-19 Recovery Loss Mitigation Option (COVID-19 Recovery Option), or FHA-Home Affordable Modification Program (FHA-HAMP) Option (for Non-Borrowers Who Acquired Title through an Exempted Transfer), as of September 30, 2025, the Mortgagee must complete the COVID-19 ALM, COVID-19 Recovery Option, or FHA-HAMP Option. The COVID-19 ALM, COVID-19 Recovery Options, and FHA-HAMP expire on September 30, 2025, and final documents may not be sent after this date. For Borrowers in Imminent Default or non-borrowers who acquired title through an exempted transfer, the Mortgagee may send final documents after September 30, 2025, where the home retention option was approved no later than September 30, 2025. i. Definitions The Loss Mitigation Home Retention Options are: • Repayment Plans; • Forbearances; • Standalone Partial Claims; • Standalone Loan Modifications; • Combination Loan Modifications and Partial Claims; • Payment Supplements; and III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1212 Last Revised: 11/26/2025 • Outside of the Waterfall Loan Modifications (OWL). Early Default Intervention Tools refer to Repayment Plans and Forbearances. Permanent Home Retention Options refer to Standalone Partial Claims, Standalone Loan Modifications, Combination Loan Modifications and Partial Claims, and Payment Supplements. Arrearages refer to amounts needed to bring the Mortgage current and must only include: • for Repayment Plans, Standalone Partial Claims, and Payment Supplements, principal amounts that are past due; • unpaid accrued interest; • past due escrow amounts and/or Mortgage advances for escrow items; • projected escrow shortage amount, except for Repayment Plans; and • allowable legal fees and foreclosure and bankruptcy costs for work performed for the current Default episode as of the date of the foreclosure cancellation and not higher than the fees and costs HUD has identified as customary and reasonable. ii. Early Default Intervention Tools (A) Repayment Plans (1) Definitions A Repayment Plan allows a Borrower to resume their Mortgage Payment after a Delinquency and includes an additional amount required to repay the arrearages, as calculated in Appendix 4.0 – FHA Home Retention Options Calculations, Part A: Arrearages, Step 2, over a specific period to reinstate the Mortgage. A Repayment Plan Agreement is a written document that provides the Borrower with the terms of the plan to reinstate the Delinquent Mortgage. (2) Standard The Mortgagee must review the Borrower for a Repayment Plan if the Borrower affirms the monthly installment amount required under the terms of the Repayment Plan Agreement is affordable. Prior to providing the Repayment Plan Agreement, the Mortgagee must inform the Borrower that they may be eligible for a Permanent Home Retention Option that may reduce the Mortgage Payment. The Mortgagee must: • ensure the term of the Repayment Plan does not exceed 24 months; and • require the delinquency to be repaid in equal monthly installments, in addition to the Mortgage Payments, over the term of the Repayment Plan. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1213 Last Revised: 11/26/2025 The Mortgagee must suspend or terminate any foreclosure action upon approval of a Repayment Plan in accordance with the requirements for Terminating Foreclosure Proceedings for Loss Mitigation. Repayment Plans are not eligible for Mortgage incentive payments. (3) Borrower Qualifications The Mortgagee must ensure the Borrower attests they can make the Mortgage Payment under the Repayment Plan. The Mortgagee must ensure that the Borrower’s arrearages do not exceed: • four months Delinquent PITI; or • 12 months Delinquent PITI for: • Mortgages funded in connection with mortgage revenue bonds that are restricted by the IRC and cannot extend the term of a Mortgage, or the interest rate cannot be modified; or • Borrowers who have less than $1,000 in Partial Claim funds available; or • Borrowers who received a Permanent Home Retention Option in the past 24 months, where the first legal action to initiate foreclosure has not been completed. Borrowers who failed a TPP for a Permanent Home Retention Option during the current Default episode are not eligible for a Repayment Plan. (4) Repayment Plan Agreement The Mortgagee must provide the Borrower with the Repayment Plan Agreement at least 15 Days before the date the first installment is due. The Borrower is not required to sign and return the Repayment Plan Agreement. The Mortgagee must ensure the Repayment Plan Agreement provides the following information: • the specific months for which the account is Delinquent and the total arrearage that accrued prior to the beginning of the Repayment Plan; • the term of the plan in months; • the monthly installment amount required, which must include: • the current monthly installment; and • the additional amount required to cover arrearages; • late fees will not be assessed while the Borrower is performing under the terms of the Repayment Plan; • if the escrow amount changes, the monthly installment may also change during the Repayment Plan; III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1214 Last Revised: 11/26/2025 • the Borrower may contact the Mortgagee to determine if other Loss Mitigation Options or an adjustment to the Repayment Plan is available if their financial circumstances change; • the Borrower may pre-pay at and time; and • remittance of the initial monthly installment in an amount equal to or greater than the amount required under the plan is considered the Borrower’s acceptance of the Repayment Plan Agreement. (5) Repayment Plan Failure The Borrower has failed a Repayment Plan if: • the Mortgagee becomes aware the Property has been condemned or abandoned; • the Borrower does not make a scheduled monthly installment by the last Day of the month the installment was due; or • the Borrower informs the Mortgagee that the terms of the Repayment Plan Agreement will not be fulfilled. The Mortgagee must apply remaining funds in suspense, if any, to the Borrower’s account in accordance with Application of Payments. If the Repayment Plan fails, the Mortgagee must evaluate the Borrower for the other Loss Mitigation Options. If the Borrower is not approved for a different Loss Mitigation Option, the Mortgagee must initiate foreclosure. HUD provides an automatic 90-Day extension during which the Mortgagee must take one of these actions. (6) Required Documentation The Mortgagee must retain the Repayment Plan Agreement in the Servicing File and the Claim File. (B) Forbearance (1) Definition A Forbearance allows for reduced or suspended monthly Mortgage Payments for a specified period. (2) Eligibility The Mortgagee may offer an initial Forbearance to a Borrower when: • the Borrower attests they have an unresolved Financial Hardship; • the first legal action to initiate foreclosure has not been completed; and • the Forbearance period(s) will not result in an accrued arrearage exceeding 12 months of Delinquent PITI. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1215 Last Revised: 11/26/2025 (3) Standard The Mortgagee may provide an initial Forbearance for a period of one to three months. After the initial Forbearance period, the Mortgagee must contact the Borrower monthly to verify occupancy and continued eligibility and to adjust the terms of the agreement if there is a change in financial circumstances. For Borrowers impacted by a Presidentially-Declared Major Disaster Area (PDMDA) the Mortgagee must review the Borrower for a Disaster Forbearances for Borrowers in PDMDAs. The maximum Forbearance per Default episode is 12 months, provided the accrued arrearage does not exceed the equivalent of 12 months Delinquent PITI for the duration of the plan. For Graduated Payment Mortgages (GPM) and Growing Equity Mortgages (GEM), this will be calculated by multiplying 12 times the monthly payments due on the date of Default. Accrued arrearages during a PDMDA Forbearance within the same Default episode do not count against the 12-month Delinquent PITI maximum. The Mortgagee may reduce, suspend, or both, the required monthly Mortgage Payment for the Forbearance period. The Mortgagee may offer additional Forbearance periods for one to three months, where: • the eligibility for a Forbearance continues to be met; and • the Servicing File reflects the Borrower affirms the continued need for a Forbearance prior to each subsequent period. Forbearances are not eligible for loss mitigation incentive payments. (4) Forbearance Agreement The Mortgagee must provide the Forbearance Agreement to the Borrower within 15 Days from the date of approval of the initial Forbearance period and must provide an updated Forbearance Agreement for each subsequent Forbearance period. The Borrower is not required to sign and return the Forbearance Agreement. The Mortgagee must ensure the Forbearance Agreement provides the following information: • the term of the plan in months; • the monthly installment amount required, if any; • late fees will not be assessed during the Forbearance; • the Borrower should contact the Mortgagee to determine if other Loss Mitigation Options are available if their financial circumstances change; and III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1216 Last Revised: 11/26/2025 • the Borrower may pre-pay at any time. (5) Payment Application The Mortgagee must place payments submitted by the Borrower during the Forbearance period in a suspense account which is to be identified as belonging to the Borrower. When the suspense funds total a full monthly payment, the Mortgagee must apply the payment to the Borrower’s account in accordance with HUD’s Partial Payments for Mortgages in Default guidance and any other applicable requirements. If the Borrower does not complete the terms of the Forbearance, any funds held in suspense must be applied to the Borrower’s account. (6) Expiration of Forbearance Agreement During the month in which the Forbearance Agreement is to expire, the Mortgagee must contact the Borrower to determine if the Borrower qualifies for: • an additional period of Forbearance, provided that the Forbearance will not allow for more than 12 months of Delinquent PITI; • a Repayment Plan; or • a permanent Loss Mitigation Option. (7) Forbearance Failure A Forbearance is considered failed if: • the Property is condemned or abandoned; or • the Borrower: • informs the Mortgagee that the terms of the Forbearance Agreement will not be fulfilled; or • • fails to perform under the terms of the Forbearance Agreement for 60 Days without any advisement to the Mortgagee of any problems that prevented the Borrower from complying with the terms of the agreement. If the Forbearance fails, the Mortgagee must evaluate the Borrower for another Loss Mitigation Option. If the Borrower is not approved for a Loss Mitigation Option, the Mortgagee must commence or recommence foreclosure. HUD provides an automatic 90-Day extension during which the Mortgagee must take one of these actions. (8) Required Documentation The Mortgagee must retain in the Servicing File and the Claim File, if applicable, a copy of the Forbearance Agreement and each subsequent Forbearance Agreement. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1217 Last Revised: 11/26/2025 iii. Permanent Home Retention Options Prior to providing a Borrower with a Permanent Home Retention Option, the Mortgagee must explain to the Borrower, verbally or in writing: • the different Early Default Intervention Tools, Permanent Home Retention Options, and Home Disposition Options, including: • the Borrower’s responsibilities under each; and • the repercussions if the Borrower does not meet their responsibilities; • the Borrower will not be eligible to receive more than one Permanent Home Retention Option in a 24-month period except in cases of natural disasters; • if the Borrower qualifies for the Standalone Partial Claim, they may also be eligible for a Permanent Home Retention Option that may reduce the Mortgage Payment; and • that a TPP will be required and the documents for the Permanent Home Retention Option will be required to be executed after the TPP to finalize the option. (A) Standard Eligibility The Mortgagee must ensure the following requirements are met in addition to all requirements for the appropriate Permanent Home Retention Option. (1) Mortgage Status The Mortgagee must ensure that: • a minimum of four Mortgage Payments have been paid by the Borrower on the Mortgage, except for Disaster Home Retention Options; • the Mortgage is in Default or Imminent Default; • any foreclosure action is suspended or terminated in accordance with the requirements for Terminating Foreclosure Proceedings for Loss Mitigation; and • three or more full monthly payments are due and unpaid (i.e., 61 Days or more past due) prior to sending the TPP Agreement for the approved Permanent Home Retention Option. The Mortgagee may send the TPP Agreement to Borrowers in Imminent Default prior to three or more full monthly payments becoming due and unpaid. The Mortgagee may consider a Borrower in Imminent Default who has completed a TPP and remains in Default as meeting the delinquency requirement. (2) Borrower Qualifications The Mortgagee must ensure that the Borrower: • attests that the Default or Imminent Default is due to a Financial Hardship; • attests that they can resume making their current Mortgage Payment or indicates they require payment reduction; III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1218 Last Revised: 11/26/2025 • has not executed an agreement for a Permanent Home Retention Option or OWL, where the date of execution on a previous Permanent Home Retention Option occurred in the past 24 months, at the time the Permanent Home Retention Option is executed, except: • a Borrower who received a PDMDA Home Retention Option or a COVID-19 Home Retention Option in the past 24 months remains eligible for a Permanent Home Retention Option or OWL; and • a Borrower who received a Permanent Home Retention Option, OWL, or PDMDA Home Retention Option within the past 24 months remains eligible for a PDMDA Home Retention Option if impacted by a disaster associated with a PDMDA; • completes the Borrower Affordability Attestation for the Permanent Home Retention Option; and • has successfully completed a TPP. (3) Property Condition The Mortgagee must conduct any review it deems necessary, including a property inspection, when: • the Mortgagee receives notice from the Borrower, local government, or other third parties regarding adverse property condition; or • the Property may be affected by a disaster event. If the Mortgagee determines the property condition will adversely impact the long-term use of the Property or ability to support the debt, the Mortgagee is not required to review the Borrower for the Permanent Home Retention Options. (B) Borrower Affordability Attestation (1) Definition Borrower Affordability Attestation refers to the Borrowers’ affirmation that the Borrower can make the offered monthly Mortgage Payment under the Permanent Home Retention Option and they will not be eligible for another Permanent Home Retention Option, which may provide additional payment reduction, in the 24 months following the execution of the offered Permanent Home Retention Option, except for a PDMDA. (2) Standard The Mortgagee must obtain the Borrower Affordability Attestation either electronically, by hard copy, or verbally for all Permanent Home Retention Options prior to issuing the final documents for the Permanent Home Retention Option. The Mortgagee must ensure: III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1219 Last Revised: 11/26/2025 • the Borrower affirms the monthly Mortgage Payment amount offered is affordable; and • the Borrower acknowledges they will not be eligible for another Permanent Home Retention Option, which may provide additional payment reduction, in the 24 months following the execution of the offered Permanent Home Retention Option, except for a PDMDA. If the Mortgagee receives the Borrower Affordability Attestation verbally, the Mortgagee must certify that they have verbally received the Borrower’s attestation and note the name and the phone number of the Borrower that provided the attestation. If the Mortgagee requires an electronic or hard copy of the Borrower Affordability Attestation, the Mortgagee must provide the Borrower 30 Days to return it. If it has not been returned, the Mortgagee must contact the Borrower, at a minimum, twice within the 30-Day period to notify the Borrower that the Borrower Affordability Attestation must be returned within 30 Days. The Mortgagee must receive the Borrower Affordability Attestation from at least one Borrower. If the Borrower Affordability Attestation is not obtained, the Mortgagee must consider the Borrower to be unresponsive, evaluate the Borrower for an OWL, and commence, recommence, or resume foreclosure within 90 Days if the Borrower is ineligible for the OWL. (3) Required Documentation The Mortgagee must include the Borrower Affordability Attestation in the Servicing File and Claim File. (C) Trial Payment Plans (1) Definitions A Trial Payment Plan (TPP) is a payment plan for a period of three months, four months for a Borrower in Imminent Default, or six months for Non-Borrowers Who Acquired Title through an Exempted Transfer, during which the Borrower must make the agreed-upon consecutive monthly payments beginning after the Mortgagee has approved the Borrower for a Permanent Home Retention Option or OWL, and prior to executing the permanent Loss Mitigation documents. A Trial Payment Plan (TPP) Agreement is a written document that establishes the TPP terms, which must be provided to the Borrower prior to the first payment due under the TPP payment due date. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1220 Last Revised: 11/26/2025 (2) Standard (a) Trial Payment Plan Required The Mortgagee must ensure the Borrower successfully completes a TPP for a period of three months before executing Permanent Home Retention Option or OWL documents. The Mortgagee must ensure Borrowers in Imminent Default successfully complete a TPP for a period of four months before executing Permanent Home Retention Option documents. The Mortgagee must ensure Non-Borrowers Who Acquired Title through an Exempted Transfer successfully complete a TPP for a period of six months before executing Permanent Home Retention Option documents. (b) Trial Payment Terms The Mortgagee must ensure the following terms of the TPP are met: • the TPP does not exceed a period of three consecutive months, four consecutive months for Borrowers in Imminent Default, or six consecutive months for Non-Borrowers Who Acquired Title through an Exempted Transfer; • the payments must be made in, or no more than 15 Days before, the month they are due; • for any Loss Mitigation Option that includes a Loan Modification, the interest rate for the TPP and the permanent Loan Modification is not greater than the Market Rate; • the Market Rate must be established when the TPP is offered; • the monthly payment under the TPP must be the projected monthly Mortgage Payment, after an escrow analysis, for the Permanent Home Retention Option or OWL; and • Late Charges must be waived during the trial payment period if the Borrower is paying as agreed on the TPP. For Borrowers completing a TPP after a default during a Payment Supplement Period, the Mortgagee must: • ensure the amount of the monthly payment during the TPP is the projected monthly Mortgage Payment for the Permanent Home Retention Option or OWL; • for Standalone Partial Claims, continue to apply the Monthly Principal Reduction (MoPR) during the TPP when the Mortgagee has received and accepted, at a minimum, the Borrower’s portion of the Mortgage Payment under the Payment Supplement; and • for Loan Modifications or Combination Loan Modifications and Partial Claims: III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1221 Last Revised: 11/26/2025 • not reduce the TPP payment amount by the MoPR; and • apply the MoPR when the Borrower’s portion of the Mortgage Payment due under the Payment Supplement has been received and accepted, including partial payments accumulated during the TPP. (c) Trial Payment Plan Agreement The Mortgagee must provide the TPP Agreement to all parties that will be required to execute the Loss Mitigation Agreement for the Permanent Home Retention Option at least 15 Days before the date the first trial payment is due. The Borrower is not required to sign and return the TPP Agreement. The TPP Agreement must include: • the duration of the TPP period; • the amount of the monthly payments, which are the projected monthly Mortgage Payments for the Permanent Home Retention Option or OWL; • the months the payments are due during the TPP period; • the Market Rate for the modified Mortgage, if applicable; • the payments must be made in, or no more than 15 Days before, the month they are due; • remittance of the initial monthly installment in an amount equal to or greater than the amount required under the TPP is considered the Borrower’s acceptance of the TPP Agreement; and • a notice that indicates: • after successfully completing the TPP, the Borrower must continue making payments in accordance with the terms of the TPP Agreement until the Permanent Home Retention Option or OWL documents have been ratified by all parties; and • the reasons a TPP would fail. (d) Application of Trial Payments When the trial payment is less than a full monthly payment the Mortgagee must apply them in accordance with Partial Payments for Mortgages in Default and any applicable federal regulations. (3) Trial Payment Plans during Foreclosure The Mortgagee must suspend or terminate the foreclosure action in accordance with Terminating Foreclosure Proceedings for Loss Mitigation. (4) Successful Completion of Trial Payment Plan Period Upon the Borrower’s successful completion of a TPP, the Mortgagee must: III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1222 Last Revised: 11/26/2025 • prepare the Loss Mitigation documents to be effective no later than the first Day of the second month following the final TPP month; • provide the Loss Mitigation Agreement documents to all required parties at least 15 Days before the effective date of the Permanent Home Retention Option or OWL with the deadline to return executed documents; • apply funds remaining in the Borrower’s suspense account that do not total a full PITI payment to any calculated escrow shortage or to reduce any amounts that would otherwise be capitalized in the principal balance; and • provide an executed copy of the Loss Mitigation Agreement documents to the Borrower no later than 15 Days after receipt of the documents. (5) Trial Payment Plan Failure (a) Standard The Borrower has failed a TPP when one of the following occurs: • the Mortgagee becomes aware the Property has been condemned or abandoned; • the Borrower does not make a scheduled TPP payment by the last Day of the month the payment was due; or • the Borrower informs the Mortgagee that the terms of the TPP Agreement will not be fulfilled. The Mortgagee must report the TPP failure in SFDMS, even if a second TPP may be offered. The Mortgagee must apply all funds remaining in suspense to the Borrower’s account in accordance with Application of Payments. If the Borrower fails a TPP and is not eligible for another Permanent Home Retention Option, the Mortgagee must evaluate the Borrower for Home Disposition Options. HUD provides an automatic 90-Day extension for the Mortgagee to approve another Loss Mitigation Option, or to commence or recommence foreclosure, should a TPP fail. (b) Reconsideration for Permanent Home Retention Options After TPP Failure Borrowers who fail an initial TPP for the following Home Retention Options, due to not making a scheduled TPP payment by the last Day of the month the payment was due, are eligible for re-evaluation for a Permanent Home Retention Option: • a Standalone Partial Claim; III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1223 Last Revised: 11/26/2025 • a Standalone Loan Modification in lieu of a Partial Claim (calculated using Appendix 4.0, Part C: Borrower Attests They Can Resume Mortgage Payments); or • an OWL. All other Borrowers are ineligible for re-evaluation for a second TPP, but remain eligible to be reviewed for Home Disposition Options. For an eligible Borrower, the Mortgagee must: • re-evaluate the Borrower for a Permanent Home Retention Option, in order, using Appendix 4.0, Part D through Part F; and • if the Permanent Home Retention Option provides at least a $1.00 reduction in the P&I payment from the initial TPP, offer the Borrower one additional TPP for the Permanent Home Retention Option. If the Borrower receives a second TPP, the Mortgagee must report the use of a TPP in SFDMS after the TPP failure for the initial TPP is reported. If a second Permanent Home Retention Option is unable to provide the required P&I reduction or if the Borrower fails a second TPP, the Mortgagee must evaluate the Borrower for Home Disposition Options. (6) Required Documentation The Mortgagee must retain a copy of any TPP Agreement in the Servicing File and the Claim File. (D) Execution of Permanent Home Retention Option Documents The Mortgagee must send the Permanent Home Retention documents to the Borrower within 15 Days from the successful completion of a TPP. The Mortgagee must cease all foreclosure related activities upon acceptance of the executed Permanent Home Retention Option documents. The Mortgagee must ensure that Permanent Home Retention Option documents are executed by all parties necessary to ensure: • HUD’s first lien position is preserved; and • the Agreement is enforceable under state and local law. The Mortgagee must accept the executed Permanent Home Retention Option documents returned within the month of the effective date of the Permanent Home Retention Option, provided the Borrower continues to make Mortgage Payments. The Mortgagee must include a written notification with the Permanent Home Retention Option documents that advises the Borrower: III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1224 Last Revised: 11/26/2025 • the Permanent Home Retention Option will be denied if the documents are not returned within the month of the effective date of the Permanent Home Retention Option; • the Permanent Home Retention Option will be denied if the Borrower does not continue to make Mortgage Payments; and • the Permanent Home Retention Option must fully reinstate the Mortgage within the month of the effective date even if the Mortgagee accepts the executed documents after the effective date. If the Borrower fails to return the executed Permanent Home Retention Option documents within the month of the effective date of the Permanent Home Retention Option, the Mortgagee must deny the option. If the Permanent Home Retention Option is denied, the Mortgagee must evaluate the Borrower for Home Disposition Options. If the Borrower is denied for a Home Disposition Option, the Mortgagee must commence, recommence, or resume foreclosure no later than 90 Days after denial of the Loss Mitigation Option. The Mortgagee must provide a fully executed copy of the Loss Mitigation Agreement documents to the Borrower no later than 15 Days after the documents are accepted by the Mortgagee. iv. Partial Claims (A) Definition A Partial Claim is FHA’s reimbursement of a Mortgagee advancement of funds on behalf of the Borrower in an amount necessary to assist in reinstating the Delinquent Mortgage and, where applicable, a principal deferment. (B) Standard The Partial Claim must be secured by a zero interest subordinate promissory Note and Mortgage executed by the Borrower in favor of HUD. The Mortgagee must ensure that any Partial Claim, whether a Standalone Partial Claim or in combination with a Loan Modification, fully reinstates the Mortgage. A Partial Claim offered in combination with a Loan Modification may include an amount used for principal deferment, when required. Mortgagees must perform an escrow analysis to ensure that the delinquent payments to be included in the Partial Claim reflect the actual escrow funds required for those months and adequate funds to pay escrow bills when due to avoid a future escrow shortage without creating a surplus. The minimum Partial Claim amount must be no less than $1,000, except for Partial Claims for Home Retention Options associated with a PDMDA. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1225 Last Revised: 11/26/2025 The Mortgagee must advance funds for the Partial Claim prior to filing a claim for reimbursement. Mortgagees may include an additional monthly payment to the arrearage amount to allow time for the Borrower to return the executed documents, and to ensure the Partial Claim includes all arrearages accrued prior to the Borrower resuming Mortgage Payments. No other fees or costs may be included in the Partial Claim. (C) Statutory Maximum for Partial Claims (including Payment Supplement) Statutory Maximum for Partial Claims refers to the total outstanding balance of all Partial Claims and Payment Supplements and must not exceed 30 percent of the Mortgage’s unpaid principal balance, as of the date of Default at the time of payment of the initial Partial Claim and will remain constant for the life of the Mortgage. The total funds available for a Partial Claim must be calculated per Determining the Maximum Funds Available for a Partial Claim. When reviewing Borrowers for a Partial Claim, a Streamline Refinance on the same Property and by the same Borrower is not considered a new Mortgage for determining the statutory maximum value for all Partial Claims. (D) Verification of Previous Partial Claim(s) For purposes of verifying all previous Partial Claims, the Mortgagee must also verify all Payment Supplements in the total balance of all Partial Claims, if applicable. The Mortgagee must verify if the Borrower previously received one or more Partial Claim(s) or Payment Supplements and, if applicable, the total balance of all Partial Claims. The Mortgagee must: • verify through HUD’s Single Family Mortgage Asset Recovery Technology (SMART) Integrated Portal (SIP) if the Borrower has previously received a Partial Claim, including reviewing prior case number loan information; and • if the Borrower has previously received a Partial Claim, the Mortgagee must verify in SIP: • the unpaid principal balance at the time of payment of the initial Partial Claim, as reported in the Unpaid Balance Claimed field; and • the aggregate total of all Partial Claim(s) paid on the Mortgage. The Mortgagee must review their records to ensure all previous Partial Claims and Payment Supplements have been submitted to HUD and are reported in SIP. If the Mortgagee is aware of other Partial Claims or Payment Supplements that are not reported in SIP, the Mortgagee must include those amounts in the calculation. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1226 Last Revised: 11/26/2025 (E) Determining the Maximum Funds Available for a Partial Claim The Mortgagee must use the calculations in Appendix 4.0 – FHA Home Retention Options Calculations, Part B: Partial Claim Availability, to determine the maximum funds available for a Partial Claim. (F) Interest on Partial Claims No interest will accrue on the Partial Claim. (G) Standalone Partial Claim (1) Notification to Borrower When offering a Standalone Partial Claim, the Mortgagee must advise the Borrower that they may be eligible for a Permanent Home Retention Option that may be able to reduce the Mortgage Payment. (2) Borrower Eligibility The Mortgagee must ensure the Borrower: • has sufficient Partial Claim funds to reinstate the Mortgage, as calculated in Appendix 4.0, Part C; • the Borrower attests they can resume Mortgage Payments; and • successfully completes a TPP. (3) Compare Monthly P&I for Standalone Partial Claim and Standalone Loan Modification Where the Borrower attests that they can resume their Mortgage Payment, the Mortgagee must compare the modified P&I for the Standalone Loan Modification amortized for a 30-year term at Market Rate, as calculated in Appendix 4.0, Part C, Step 2, to the P&I for the Standalone Partial Claim to preserve Partial Claim funds. The Mortgagee must determine if the P&I for the Standalone Loan Modification provides a P&I payment that is at least $1.00 less than the P&I for the Standalone Partial Claim. • If yes, the Mortgagee must offer the Borrower a Standalone Loan Modification. • If no, the Mortgagee must offer the Borrower a Standalone Partial Claim. If the Borrower does not meet the requirements for a Standalone Partial Claim, the Mortgagee must evaluate the Borrower for a Permanent Home Retention Option that provides payment reduction, starting with the Standalone Loan Modification. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1227 Last Revised: 11/26/2025 (H) Partial Claims as Part of Combination Loan Modification and Partial Claim The Mortgagee must ensure: • the Borrower meets the requirements for a Combination Loan Modification and Partial Claim; and • the amount of the Partial Claim as part of the Combination Loan Modification and Partial Claim does not exceed the amount required to provide the target payment reduction. (I) Payment of Partial Claim HUD will not require payment on the Partial Claim until the first of the following events occurs: • the maturity of the Mortgage; • the sale or transfer of the Property, except for non-borrowers who acquired title through an exempted transfer; • the assumption of the Mortgage, except for non-borrowers who acquired title through an exempted transfer; • the Payoff of the Mortgage, except that HUD will agree to subordinate the Partial Claim Note to a Streamline Refinance; or • if provided for under the Partial Claim Note, the termination of FHA insurance. HUD does not prohibit partial or total payment on the Partial Claim at any time prior to the due date for the Partial Claim. (J) Partial Claim Documents (1) Definition Partial Claim Documents refers to a Partial Claim promissory Note and Subordinate Mortgage, or, for a Payment Supplement, the Payment Supplement promissory Note, Payment Supplement Agreement, and Payment Supplement Subordinate Mortgage. (2) Partial Claim or Payment Supplement Promissory Note and Subordinate Mortgage The Mortgagee must prepare the promissory Note and subordinate Mortgage as follows: • the promissory Note must be executed with the name of the Secretary; • the subordinate Mortgage must be prepared and recorded; and • the promissory Note and subordinate Mortgage must include: • the full FHA Case Number; III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1228 Last Revised: 11/26/2025 • the provisions of HUD’s model promissory Note and subordinate Mortgage or a substantially similar document; and • any amendments as required by state or federal law or regulations. The Mortgagee must provide the Borrower with a promissory Note and subordinate Mortgage to be signed by the Borrower and recorded by the Mortgagee. (3) Execution of Partial Claim Documents after Trial Payment Plan The Mortgagee must ensure that the Borrower has successfully completed a TPP before executing the promissory Note and subordinate Mortgage. (4) Recordation of Partial Claim Documents The Mortgagee must submit executed Partial Claim security instruments to the recording jurisdiction for recordation within 10 business days from the date the Mortgagee receives the executed documents from the Borrower or, where HUD execution is required, receipt from HUD. The Mortgagee must submit the security instruments for recordation before filing the claim with HUD. The Mortgagee must ensure that the recordation of the Partial Claim security instruments does not jeopardize the first lien status of the FHA-insured Mortgage. There is no lien priority requirement for the filing of a Partial Claim or Payment Supplement. (5) Required Documentation The Mortgagee must retain the following in the Servicing File and the Claim File: • a copy of the executed promissory Note and subordinate Mortgage; • evidence that the Mortgage was submitted timely for recording; and • the date the Mortgagee received the executed Partial Claim Documents from the Borrower and the date the subordinate Mortgage was sent to be recorded. (6) Delivery of Partial Claim Documents to HUD The Mortgagee must deliver to HUD: • no later than 60 Days from the execution date, the original promissory Note; • no later than six months from the execution date, the recorded subordinate Mortgage; and • with each delivery of Partial Claim Documents, the Mortgagee must include a cover letter with the FHA case number for the documents that are being delivered. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1229 Last Revised: 11/26/2025 (7) Missing and Unacceptable Partial Claim Documents The Mortgagee may use SIP to determine if Partial Claim Documents were received and accepted by HUD. The Mortgagee must make corrections to satisfy the document delivery requirements for complete and accurate Partial Claim Documents if the Partial Claim Documents received from the Mortgagee contain deficiencies or discrepancies. If HUD indicates that Partial Claim Documents are missing, but the Mortgagee’s records confirm they were delivered to HUD, the Mortgagee must provide a signed affidavit that the Partial Claim Documents were delivered to HUD and include: • proof of original delivery with a copy of the list of contents with the FHA case number(s) for the documents that were delivered; and • copies of the missing Partial Claim Documents, with a list of documents included. If the original Partial Claim promissory Note is lost prior to submission to HUD, the Mortgagee must deliver a lost note affidavit to HUD’s Loan Servicing Contractor no later than 60 Days from the date the Borrower executed the Partial Claim security instruments. The lost note affidavit must be acceptable under state law, and must include the following: • the FHA case number; • the Borrower(s)’ name; • the FHA-insured property address; • the original Note amount; • the date the Borrower executed the Partial Claim security instruments; and • a statement that the Mortgagee has exhausted all efforts to locate the original Partial Claim promissory Note executed by the Borrower. Required Documentation The Mortgagee must retain in the Servicing File and Claim File a copy of the lost note affidavit and all related documentation provided to HUD. (8) Requests for Extensions of Time for Delivery of Partial Claim Documents (a) Standard The Mortgagee may request an extension of time by submitting the request to HUD via EVARS when: III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1230 Last Revised: 11/26/2025 • the Mortgagee can demonstrate timely submission of Recordation of Partial Claim Documents; and • Partial Claim Document delivery has been delayed due to events beyond the Mortgagee’s control. HUD will not approve an extension of time for submission of the promissory Note. (b) Required Documentation The Mortgagee must retain any approved extensions received from HUD in the Servicing File and the Claim File, if applicable. (9) Failure to Provide Partial Claim Documents When the Mortgagee fails to provide HUD with the promissory Note and recorded subordinate Mortgage within the required time frames and any approved extensions, HUD may require reimbursement of the full amount of the Partial Claim funds and any incentive fee. Upon reimbursement of the full amount of the Partial Claim funds, the Mortgagee must: • not reverse the application of the Partial Claim funds to the Borrower’s Mortgage and must not submit a new claim; • continue to service the Mortgage according to the terms of the Partial Claim or a Payment Supplement; and • only pursue repayment of the Partial Claim funds from the Borrower under the original terms of the promissory Note and subordinate Mortgage. If the security instrument has been recorded, the Mortgagee must provide an assignment to HUD to execute the assignment and the Partial Claim Documents to the Mortgagee. Upon receipt of the executed assignment, the Mortgagee must submit the assignment to the jurisdiction for recordation within 30 business days from the date the Mortgagee receives the executed document from HUD. (K) Reconciliation of Partial Claim Proceeds to Promissory Note Amounts If the Mortgagee miscalculates the Partial Claim amount, resulting in an overpayment to the Mortgagee, the Mortgagee must remit the overpaid amount immediately to HUD via Pay.gov - Single Family Notes Lender Entry Form. In the event the Mortgagee claimed less than the actual Partial Claim promissory Note amount, the Mortgagee must absorb the cost of the miscalculation. The Mortgagee must include their review process for ensuring the accurate calculation of Partial Claims in their required QC Plan. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1231 Last Revised: 11/26/2025 (L) Servicing of Partial Claims The Mortgagee remains responsible for servicing the Partial Claim until the debt and security instruments are legally recorded in the appropriate jurisdiction and delivered to HUD. (M) Notification to HUD Mortgagees must notify HUD when the first Mortgage is being paid in full or refinanced. HUD’s Loan Servicing Contractor must be contacted to request a payoff quote on the outstanding Partial Claim. v. Loan Modifications (A) Definitions A Loan Modification refers to a Standalone Loan Modification or a Loan Modification provided as part of a Combination Loan Modification and Partial Claim, which provides a permanent change in one or more terms of a Borrower’s Mortgage. A Standalone Loan Modification refers to a permanent change in one or more terms of a Borrower’s Mortgage to resolve the outstanding Arrearage by re-amortizing the total outstanding debt at the Market Rate and extending the term. A Combination Loan Modification and Partial Claim refers to a permanent change in one or more terms of a Borrower’s Mortgage to resolve the outstanding Arrearage by re-amortizing the total outstanding debt at the Market Rate and extending the term and may include a principal deferment when required. (B) Standard The Mortgagee must ensure that the Loan Modification fully reinstates the Mortgage, complies with the interest rate and modified principal balance provisions below, and must only capitalize arrearages, as calculated in Appendix 4.0, Part A: Arrearages. The Mortgagee must perform an escrow analysis to ensure that the amount to be capitalized includes the delinquent escrow payments and adequate funds to pay escrow bills when due to avoid a future escrow shortage without creating a surplus. No other costs may be capitalized in the Loan Modification. The Mortgagee must ensure that Hazard Insurance and Flood Insurance, where required, are updated for the modified mortgage amount. (C) Exemption for Mortgages that Cannot be Modified Mortgagees who service Mortgages funded in connection with mortgage revenue bonds that are restricted by the Internal Revenue Code (IRC) are exempt from III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1232 Last Revised: 11/26/2025 providing a Loan Modification if the term cannot be extended or the interest rate cannot be modified. (D) Interest Rate The Mortgagee must ensure that any modified loan is a fixed rate Mortgage. At the Mortgagee’s discretion, the Mortgagee may reduce Note interest rates below Market Rate; however, Discount Points associated with rate reductions are not reimbursable. When increasing Note interest rates, the Mortgagee must calculate the maximum interest allowable as the Market Rate. (1) Market Rate Market Rate is a rate that is no more than 25 bps for a 30-year loan modification or 50 bps for a 40-year loan modification greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30-year fixed rate conforming Mortgages (U.S. average), rounded to the nearest one-eighth of 1 percentage point (0.125 percent), as of the date the Borrower is offered the TPP. The Mortgagee must first round the PMMS Rate to the nearest one-eighth of 1 percentage point (0.125 percent) before calculating the rate at 25 bps or 50 bps greater than the PMMS Rate. (2) Market Rate Resources The Weekly PMMS results are published on the Freddie Mac website. (E) Modified Loan Term The Mortgagee must re-amortize the total unpaid amount due over 360 months or 480 months from the due date of the first installment required under the modified FHA- insured Mortgage. The term of a Standalone Loan Modification may be less than 360 months if: • requested by the Borrower; and • a term that is less than 360 months does not result in the modified PITI being greater than the target monthly payment. (F) Standalone Loan Modifications (1) 30-Year Standalone Loan Modification (a) Borrower Attests They Can Resume Mortgage Payments The Mortgagee is not required to meet the minimum 25 percent P&I reduction for Borrowers who attest that they can resume their current Mortgage Payment and the P&I portion of the modified Mortgage Payment for the 30- III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1233 Last Revised: 11/26/2025 year Standalone Loan Modification is at least $1 less than the P&I for the Standalone Partial Claim as calculated in Appendix 4.0, Part C. If the Borrower affirms that they can make the modified Mortgage Payment, the Mortgagee must offer the 30-year Standalone Loan Modification. (b) Borrower Attests They Require Payment Reduction The Mortgagee must determine if a 30-year Standalone Loan Modification can achieve a minimum 25 percent reduction to the P&I portion of the Mortgage Payment using the calculations in Appendix 4.0 – FHA Home Retention Options Calculations, Part D. If a 25 percent reduction can be achieved at the Market Rate, the Mortgagee must offer the Borrower a 30-year Standalone Loan Modification. If a 25 percent reduction cannot be achieved, the Mortgagee must review the Borrower for a 40-year Standalone Loan Modification. (2) 40-Year Standalone Loan Modification The Mortgagee must determine if a 40-year Standalone Loan Modification can achieve a minimum 25 percent reduction to the P&I portion of the Mortgage Payment using the calculations in Appendix 4.0 – FHA Home Retention Options Calculations, Part D. If a 25 percent reduction can be achieved at the Market Rate, the Mortgagee must offer the Borrower a 40-year Standalone Loan Modification. If a 25 percent reduction cannot be achieved and the Borrower has a minimum of $1,000 in Partial Claim funds available, the Mortgagee must review the Borrower for a Combination Loan Modification and Partial Claim. If the Borrower does not have a minimum of $1,000 in Partial Claim funds available, the Mortgagee must offer the Borrower a 40-year Standalone Loan Modification, even if the payment increases. (3) Outside of the Waterfall Loan Modification The Mortgagee must ensure that all requirements are met for Outside of the Waterfall Loan Modifications (OWL). (G) Combination Loan Modification and Partial Claim The Mortgagee must use the calculations in Appendix 4.0 – FHA Home Retention Options Calculations, Part E, to determine the loan amount and Partial Claim funds required for a Combination Loan Modification and Partial Claim. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1234 Last Revised: 11/26/2025 The P&I reduction for a Combination Loan Modification and Partial Claim may exceed 25 percent, if required to meet the minimum $1,000 Partial Claim amount. (1) 30-Year Combination Loan Modification and Partial Claim The Mortgagee must determine if a 30-year Combination Loan Modification and Partial Claim can achieve a 25 percent reduction to the P&I portion of the Mortgage Payment. The Mortgagee must ensure the Partial Claim is no more than what is needed to achieve a 25 percent reduction to the P&I and may include principal deferment if required to achieve a 25 percent reduction. If the 25 percent reduction is achieved, the Mortgagee must offer the Borrower a 30-year Combination Loan Modification and Partial Claim. If the 25 percent reduction cannot be achieved, the Mortgagee must review the Borrower for a 40-year Combination Loan Modification and Partial Claim. (2) 40-Year Combination Loan Modification and Partial Claim The Mortgagee must determine if a 40-year Combination Loan Modification and Partial Claim can achieve a 25 percent reduction to the P&I portion of the Mortgage Payment. The Mortgagee must ensure the Partial Claim is no more than what is needed to achieve a 25 percent reduction to the P&I and may include principal deferment if required to achieve a 25 percent reduction. The Mortgagee must offer the 40-year Combination Loan Modification and Partial Claim with the maximum reduction to the P&I portion of the Mortgage Payment that can be achieved up to 25 percent and not less than 15 percent. If a minimum 15 percent reduction to the P&I portion of the Mortgage Payment cannot be achieved, the Mortgagee must review the Borrower for the Payment Supplement. (H) FHA Mortgage Insurance Coverage and Mortgage Insurance Premium When the Loan Modification has been processed in accordance with HUD requirements, HUD will extend FHA mortgage insurance coverage to the new principal balance and modified maturity date. FHA insurance will remain in force until the Mortgage has been paid in full, canceled, or terminated. The amount of MIP will continue to be based on the scheduled unpaid principal balance of the original Mortgage, without taking into consideration delinquencies or prepayments. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1235 Last Revised: 11/26/2025 vi. Payment Supplement (A) Definitions The Payment Supplement is a loss mitigation option that utilizes Partial Claim funds to bring the Mortgage current coupled with the subsequent provision of a Monthly Principal Reduction (MoPR) applied toward the Borrower’s principal due each month for a period of 36 months to provide payment relief without modification of the Mortgage. The Payment Supplement is evidenced by a non-interest bearing Note, Subordinate Mortgage, and Payment Supplement Agreement, which is a rider to and is incorporated by reference into the Payment Supplement promissory Note, given in favor of the Secretary, representing the total of all funds paid from the Mutual Mortgage Insurance Fund (MMIF) to bring the Mortgage current and then temporarily pay a portion of principal owed by the Borrower each month to reduce the Borrower’s monthly Mortgage Payment. The Monthly Principal Reduction (MoPR) is the amount of principal reduction that the Mortgagee will disburse monthly from the Payment Supplement Account and apply to the payment of principal due on the Borrower’s FHA-insured first Mortgage during the Payment Supplement Period. The Minimum Monthly Principal Reduction (Minimum MoPR) must be equal to or greater than 5 percent of the P&I portion of the Borrower’s monthly Mortgage Payment as of the date the Payment Supplement Period begins. The Minimum MoPR must also be no less than $20.00 per month as of the date the Payment Supplement Period begins. Payment Supplement Documents refer to a non-interest bearing Note, Subordinate Mortgage, and a Payment Supplement Agreement, which is a rider to and is incorporated by reference into the Payment Supplement promissory Note, given in favor of the Secretary. The Payment Supplement Period is a 36 month period during which the Mortgagee applies the MoPR to temporarily reduce the Borrower’s monthly Mortgage Payment. The Payment Supplement Account is a separate, non-interest bearing, insured custodial account that holds the balance of the funds paid by FHA for the purpose of implementing the Payment Supplement, clearly marked as holding funds for the Payment Supplement, and kept separate from funds associated with the FHA-insured Mortgage, including escrow funds. (B) Eligibility The Mortgagee must ensure that: • the Mortgage is a fixed rate Mortgage; III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1236 Last Revised: 11/26/2025 • sufficient Partial Claim funds are available to bring the Mortgage current and to fund the MoPR using the calculations in Appendix 4.0 – FHA Home Retention Options Calculations, Part B and Part F; • the Borrower meets the requirements for Loss Mitigation during Bankruptcy Proceedings; • the principal portion of the Borrower’s first monthly Mortgage Payment after the Mortgage is brought current will be greater than or equal to the Minimum MoPR; • the Borrower completes the Borrower Affordability Attestation indicating they have the ability to make the Borrower’s portion of the monthly Mortgage Payment; and • the Borrower completes a TPP. The Borrower is not eligible for a new Payment Supplement until 36 months after the date the Borrower previously executed Payment Supplement Documents. (C) Standard The Mortgagee must first advance funds for all amounts needed to bring the Mortgage current. The maximum MoPR is the lesser of a 25 percent P&I reduction for 36 months, or the principal portion of the monthly Mortgage Payment as of the date the Payment Supplement Period begins. The Mortgagee may only submit one claim for the Payment Supplement. The Mortgagee must submit the claim for the Payment Supplement no later than 60 Days after the date of execution of the Payment Supplement Documents by the Borrower. The claim must include: • all amounts needed to bring the Mortgage current before the start of the Payment Supplement Period; and • the total amount required for all estimated MoPR payments for the full Payment Supplement Period. The Mortgagee must retain the balance of the MoPR funds in the Payment Supplement Account for the benefit of the Borrower until disbursement of the funds: • for application of the MoPR; or • for remittance to HUD. The Payment Supplement Period is 36 months. For each month of the Payment Supplement Period, the Mortgagee must only disburse funds from the Payment Supplement Account to apply the MoPR to the principal portion of the monthly Mortgage Payment after the Mortgagee has received and accepted, at a minimum, the Borrower’s portion of the monthly Mortgage III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1237 Last Revised: 11/26/2025 Payment. The Mortgagee must only apply the MoPR during the 36 months of the Payment Supplement Period. Additional funds received from the Borrower that exceed the minimum portion of the Borrower’s required payment do not impact the application of the MoPR. Any additional payment made by the Borrower must not be comingled with the MoPR or funds held in the Payment Supplement Account. The Mortgagee must not recalculate the MoPR during the Payment Supplement Period. The Mortgagee must not charge the Borrower any additional fees or interest for the Payment Supplement. (D) Payment Supplement Calculations To calculate the amount of the Partial Claim the Mortgagee submits to HUD for the Payment Supplement, the Mortgagee must use the calculations in Appendix 4.0 – FHA Home Retention Options Calculations, Part F: Payment Supplement Calculations. (1) Step 1 – Calculate Partial Claim Availability The Mortgagee must determine the maximum Partial Claim amount available for the Payment Supplement. The Payment Supplement, in addition to any other existing Partial Claim, must not exceed the Statutory Maximum for Partial Claims. The Mortgagee must use the calculations in Appendix 4.0 – FHA Home Retention Options Calculations, Part B: Partial Claim Availability, to determine the maximum funds available for a Partial Claim. (2) Step 2 – Calculate Amount Required to Reinstate the Mortgage Using a Payment Supplement The Mortgagee must calculate the amounts needed to bring the Mortgage current as calculated in Appendix 4.0 – FHA Home Retention Options Calculations, Part A: Arrearages. Mortgagees may include an additional monthly payment in calculating the amount needed to bring the Mortgage current, as the payment will be past due before the Borrower returns the completed Payment Supplement Documents. (3) Step 3 – Calculate Partial Claim Funds Available for MoPR The Mortgagee must determine the amount of Partial Claim funds available for the MoPR. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1238 Last Revised: 11/26/2025 The Mortgagee must subtract the amount needed to bring the Mortgage current (calculated in Step 2) from the Borrower’s total Partial Claim funds available (calculated in Step 1). If the amount needed to bring the Mortgage current (Step 2) is greater than the Borrower’s total Partial Claim funds available (calculated in Step 1), the Borrower is not eligible for the Payment Supplement and the Mortgagee must offer the Borrower the lowest monthly P&I payment that can be achieved under the Combination Loan Modification and Partial Claim. (4) Step 4 – Calculate Maximum MoPR (a) Step 4.A The Mortgagee must calculate the amount needed to reduce the P&I portion of the Borrower’s monthly Mortgage Payment by 25 percent. (b) Step 4.B The Mortgagee must determine the maximum MoPR. The maximum MoPR is the lesser of the amount calculated in Step 4.A or the principal portion only of the Borrower’s monthly Mortgage Payment as of the date the Payment Supplement Period begins after the Mortgage is brought current. (5) Step 5 – Calculate the MoPR (a) Step 5.A The Mortgagee must determine if the amount of Partial Claim funds available for the MoPR (calculated in Step 3) is greater than or equal to the maximum MoPR (calculated in Step 4.B) for 36 months. • If the Borrower has sufficient Partial Claim funds, the amount of the MoPR is the MoPR (calculated in Step 4.B) for the 36 months of the Payment Supplement Period. Proceed to Step 6. • If the Borrower does not have sufficient Partial Claim funds for the maximum MoPR for 36 months, the Mortgagee must proceed to Step 5.B. (b) Step 5.B If the Borrower does not have sufficient Partial Claim funds available for the maximum MoPR for 36 months (calculated in Step 5.A), the Mortgagee must divide the amount of Partial Claim funds available for the MoPR (calculated in Step 3) by 36 months and proceed to Step 6. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1239 Last Revised: 11/26/2025 (6) Step 6 – Payment Reduction Test The Mortgagee must determine if the MoPR will result in no less than the Minimum MoPR for a Payment Supplement Period of 36 months where the MoPR is only applied to the principal. • If the MoPR (calculated in Step 5) reduces the P&I portion of the Borrower’s monthly Mortgage Payment by no less than the Minimum MoPR, the Mortgagee must proceed to Step 7. • If the MoPR (calculated in Step 5) fails to reduce the P&I portion of the Borrower’s monthly Mortgage Payment by the Minimum MoPR, the Borrower is ineligible for the Payment Supplement. The Mortgagee must offer the Borrower the lowest monthly P&I payment that can be achieved under: • a 40-year Combination Loan Modification and Partial Claim; or • a Standalone Partial Claim. (7) Step 7 – Compare Payment Reduction with Available Permanent Home Retention Options If the MoPR (calculated in Step 5) achieves the Minimum MoPR, the Mortgagee must compare the proposed Borrower’s portion of the P&I monthly payment under the Payment Supplement with the Borrower’s proposed P&I monthly payment under the 40-year Combination Loan Modification and Partial Claim to determine the greater payment reduction. If the Borrower is able to achieve a lower P&I monthly payment with the 40-year Combination Loan Modification and Partial Claim, the Mortgagee must offer the Borrower the 40-year Combination Loan Modification and Partial Claim. If the Borrower is not able to achieve a lower P&I monthly payment utilizing the 40-year Combination Loan Modification and Partial Claim, the Mortgagee must offer the Borrower the Payment Supplement. If the Borrower affirms that they can make the offered payment, the Mortgagee must complete that option. The Mortgagee must document the Servicing File with the option offered to the Borrower. (E) Mortgages with an Interest Rate Buydown and Mortgages Affected by the Servicemember Civil Relief Act For Mortgages with an interest rate buydown and Mortgages affected by the Servicemembers Civil Relief Act (SCRA), the Mortgagee must: • calculate the MoPR based on the P&I portion of the monthly Mortgage Payment as of the date the Payment Supplement Period begins: III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1240 Last Revised: 11/26/2025 • based on the Note rate of the Mortgage without the temporary interest rate buydown, if applicable; and • based on the Note rate of the Mortgage without the SCRA protection, if applicable; • ensure the MoPR does not exceed the principal portion of the monthly Mortgage Payment; • ensure the MoPR does not change during the Payment Supplement Period; and • ensure the Payment Supplement Period remains 36 months. (F) Payment Supplement Documents (1) Standard The Mortgagee must prepare the Payment Supplement Documents using HUD’s model Payment Supplement Documents or substantially similar documents. The Mortgagee must ensure that: • the Payment Supplement promissory Note and Payment Supplement Agreement are executed in the name of the Secretary; • all Payment Supplement Documents include the full FHA case number, are legally enforceable, and comply with all applicable laws; • the Payment Supplement Documents comply with all requirements for Partial Claim Documents; and • the Payment Supplement subordinate Mortgage is recorded. The Mortgagee must provide the Borrower with the Payment Supplement Documents to be signed. The Borrower is required to sign and return the Payment Supplement Documents before the Mortgagee brings the Mortgage current and applies the first MoPR. (2) Document Delivery Requirements The Mortgagee must deliver the Payment Supplement Documents to HUD’s Loan Servicing Contractor in accordance with Partial Claim Documents. (G) Payment Supplement Account (1) Standard The Mortgagee must segregate the funds paid by FHA for the MoPR in the Payment Supplement Account. The Payment Supplement Account must: • be deposited with a financial institution whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA); III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1241 Last Revised: 11/26/2025 • not limit the Mortgagee’s access to funds for the MoPR, require an advance notice of withdrawal, or require the payment of a withdrawal penalty; • clearly identify the funds being held in that account as being derived from and held as part of the Payment Supplement Documents executed by the Borrower as part of the Payment Supplement loss mitigation action being undertaken by the Mortgagee; and • ensure that the funds in the Payment Supplement Account are not comingled with any funds held in accounts restricted by agreements with Ginnie Mae. Neither the Mortgagee nor the Borrower has any discretion in the use and application of the funds from the Payment Supplement. Mortgagees utilizing a Trust Clearing Account must withdraw the portion that is to be deposited into the Payment Supplement Account within 48 hours of receiving the Payment Supplement funds from HUD. Mortgagees are not prohibited from holding MoPR funds for multiple Mortgages in a single account for implementing the Payment Supplement; however, the Mortgagee must not commingle funds in the Payment Supplement Account, even temporarily, with any funds held in accounts restricted by agreements with Ginnie Mae, escrow funds, or funds used for the Mortgagee’s general operating purposes or any other purpose. If the Borrower enters into bankruptcy during the Payment Supplement Period, the Mortgagee must continue to apply the MoPR unless otherwise required or permitted by law. If so required, the Mortgagee must seek court approval for the Payment Supplement and the Borrower’s reaffirmation of the Partial Claim debt. Any additional loss mitigation offered during bankruptcy must be in accordance with Loss Mitigation during Bankruptcy Proceedings. (2) Interest on Payment Supplement Account Neither the Mortgagee nor the Borrower may earn interest on a Payment Supplement Account. (H) Required Documentation The Mortgagee must retain the following in the Servicing File and the Claim File: • documentation of the amount used to bring the Mortgage current at the start of the Payment Supplement Period; • documentation of the amount of each MoPR disbursed from the Payment Supplement Account applied to the principal due on the Borrower’s monthly Mortgage Payment; • a copy of the executed Payment Supplement Documents; III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1242 Last Revised: 11/26/2025 • the date the Mortgagee received the executed Payment Supplement Documents from the Borrower and the date the subordinate Mortgage was sent to be recorded; and • evidence that the subordinate Mortgage was submitted timely for recording. (I) Disclosures to Borrower The Mortgagee must send the Borrower written disclosures annually and between 60 and 90 Days before the expiration of the Payment Supplement Period. Mortgagees may develop specific disclosure documents or may use or modify FHA’s model Annual Payment Supplement Disclosure and Final Payment Supplement Disclosure documents. Mortgagees must ensure that any disclosures comply with all applicable laws. (1) Annual Payment Supplement Disclosure The Mortgagee must send the Borrower a written disclosure annually, at minimum, during the Payment Supplement Period, including: • information about the Payment Supplement, including: • the amount used to bring the Mortgage current at the start of the Payment Supplement; • the accounting of the MoPR funds disbursed from the Payment Supplement Account and applied each month during the Payment Supplement Period; and • the funds remaining in the Payment Supplement Account; • the date of expiration of the Payment Supplement Period; • the total Payment Supplement Note amount; • the Borrower’s current monthly Mortgage Payment without MoPR and an explanation that if escrow amounts change, future payments may increase; and • a statement that the Borrower may voluntarily terminate the Payment Supplement and resume their full monthly Mortgage Payment without the MoPR and any remaining funds in the Payment Supplement Account will be returned to HUD to reduce the total outstanding Payment Supplement balance associated with the Borrower’s Payment Supplement Documents. The Mortgagee may include the disclosure as part of, or with, a monthly or annual billing statement. The disclosure may be sent electronically. (2) Final Disclosure Prior to Expiration of the Payment Supplement The Mortgagee must send the Borrower a written disclosure between 60 and 90 Days before the expiration of the Payment Supplement Period, including information about: • the expiration of the Payment Supplement Period; and III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1243 Last Revised: 11/26/2025 • the accounting of the Payment Supplement, including: • the total Payment Supplement Note amount; • the amount used to bring the Mortgage current at the start of the Payment Supplement; • the accounting of the MoPR funds disbursed from the Payment Supplement Account and applied each month for the Payment Supplement Period; • if applicable, any funds remaining in the Payment Supplement Account and a statement that FHA will use these funds to reduce the balance on the amount owed by the Borrower under the Payment Supplement Documents; and • the Borrower’s estimated first monthly Mortgage Payment following the expiration of the Payment Supplement. (J) Subsequent Default during Payment Supplement Period If a Borrower is 30 Days or more past due or in Imminent Default during the Payment Supplement Period, the Mortgagee must review the Borrower in accordance with the Loss Mitigation Program. The permanent Loss Mitigation Option will determine if: • the MoPR will continue to be applied for the remainder of the Payment Supplement Period without changes to the Payment Supplement Agreement; or • the Payment Supplement will be terminated. The Mortgagee may provide a Forbearance prior to evaluating the Borrower for Loss Mitigation Home Retention Options, and must not terminate the Payment Supplement Period during the Forbearance. (1) Mortgage Reinstatement without a Permanent Loss Mitigation Option – MoPR Continues If the Borrower, without the use of a permanent loss mitigation option, makes their portion of the missed monthly Mortgage Payments, the MoPR must be disbursed from the Payment Supplement Account and then applied to the missed payments as they are made. For these missed payments, the MoPR must be applied only to the principal portion of the missed Mortgage Payment and for the exact amount that would have been applied for an on-time payment, including when the Mortgage is brought current through payments made on a Repayment Plan or a Forbearance. The MoPR must be applied for the remainder of the Payment Supplement Period as the Borrower makes each required payment. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1244 Last Revised: 11/26/2025 (2) Mortgage Reinstatement with a Standalone Partial Claim – MoPR Continues If the Borrower requires a new loss mitigation option to reinstate their Mortgage, the Mortgagee must first evaluate the Borrower for an additional Standalone Partial Claim to bring the Mortgage current. A Borrower may receive no more than two Standalone Partial Claims to reinstate the Mortgage during the Payment Supplement Period. The Mortgagee must determine the amount of funds needed for the Standalone Partial Claim by: • calculating the amount needed to bring the Mortgage current, per the requirements for a Standalone Partial Claim; and • reducing the amount needed to bring the Mortgage current by the MoPR for each month it was not applied due to missed payments by the Borrower. If the Borrower has sufficient additional Partial Claim funds available, the Mortgagee must: • ensure the Borrower attests they can resume their portion of the monthly Mortgage Payment; • ensure all requirements in accordance with a Standalone Partial Claim are met; and • prepare and send the Borrower the documents for a Standalone Partial Claim to reinstate the Mortgage. Upon receipt of the executed Standalone Partial Claim documents from the Borrower, the Mortgagee must: • disburse and then apply funds from the Payment Supplement Account to cover the MoPR for each month it was not applied due to missed payments by the Borrower; and • advance the funds from the Standalone Partial Claim necessary to reinstate the Mortgage. For missed payments, the MoPR must be applied only to the principal portion of the missed payment and for the exact amount that would have been applied for an on-time payment. After the Mortgage is reinstated, the Mortgagee must resume applying the MoPR. The Payment Supplement Period will not be extended beyond the original term set in the Payment Supplement Agreement. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1245 Last Revised: 11/26/2025 (3) Mortgage Reinstatement with Other Permanent Loss Mitigation Option – MoPR Terminates If the Borrower cannot bring the Mortgage current through an additional Standalone Partial Claim, the Mortgagee must: • evaluate the Borrower for the available Permanent Home Retention Options or OWL; • terminate the Payment Supplement and application of the MoPR upon receipt of the new executed loss mitigation documents; • send the Borrower documentation that the Payment Supplement has been terminated and a detailed account of how the Payment Supplement funds were applied; • no later than 30 Days after the date the Payment Supplement was terminated, remit any remaining funds from the Payment Supplement Account to HUD via Pay.gov; and • report the termination of the Payment Supplement through SFDMS. (4) Mortgage Cannot Be Reinstated – MoPR Terminates For Borrowers who have not completed the Payment Supplement Period and cannot reinstate their Mortgage, the Mortgagee must ensure the following requirements are met, as applicable. (a) Pre-Foreclosure Sales In addition to the requirements for a PFS, the Mortgagee must: • proceed with the PFS requirements under Pre-Foreclosure Sale; • prior to execution of the Approval to Participate (ATP) agreement (form HUD-90045, Approval to Participate Pre-foreclosure Sale Procedure Property Sales Information Property Occupancy & Maintenance), provide the Borrower with a disclosure statement including: • the Payment Supplement will be terminated upon receipt of the executed ATP and the Mortgagee will not advance funds to cover the MoPR during the PFS marketing period; • the amount of the Partial Claim that was used to bring the Mortgage current at the start of the Payment Supplement Period; • the total amount of funds that were disbursed from the Payment Supplement Account for MoPR payments; and • the amount of individual MoPR payments and the months for which they were applied; • terminate the Payment Supplement upon receipt of the executed ATP; • ensure that no funds remaining in the Payment Supplement Account are returned to the Borrower; III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1246 Last Revised: 11/26/2025 • ensure that the funds remaining in the Payment Supplement Account are not used as a credit to the first Mortgage; • no later than 30 Days after the date of execution of the ATP, remit all remaining funds in the Payment Supplement Account to HUD via Pay.gov; • instruct the Closing Agent to pay off the outstanding amount due under the Payment Supplement Note and other Partial Claims, if any, at closing to HUD; and • no later than 45 Days after the date of termination of the Payment Supplement, upload the final accounting of the Payment Supplement into SIP. (b) Deed-in-Lieu of Foreclosure, Foreclosure Sales, and CWCOT In addition to the requirements for DIL, Foreclosures, and CWCOT, the Mortgagee must: • terminate the Payment Supplement when the sale is completed or the deed is transferred; • ensure that no funds remaining in the Payment Supplement Account are returned to the Borrower; • ensure that the funds remaining in the Payment Supplement Account are not used as a credit to the first Mortgage; and • no later than 30 Days after the date the sale is completed or the deed is transferred, remit all remaining funds in the Payment Supplement Account to HUD via Pay.gov; and • no later than 45 Days after the date the sale is completed or the deed is transferred, upload the final accounting of the Payment Supplement into SIP. (K) Completion or Termination of the Payment Supplement A Payment Supplement is completed or terminated upon the earlier of: • the end date of the Payment Supplement Period; • the application of 36 MoPRs; or • early termination of the Payment Supplement. No later than 30 Days after the date of the completion or termination of the Payment Supplement, the Mortgagee must remit any funds remaining in the Payment Supplement Account to HUD via Pay.gov. (1) Early Termination of the Payment Supplement (a) Voluntary Termination Request The Mortgagee must terminate the Payment Supplement upon Borrower request if the Borrower signs a document affirming they can resume their full III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1247 Last Revised: 11/26/2025 monthly Mortgage Payment without the MoPR and that they no longer wish to receive the MoPR. The Mortgagee must send the Borrower documentation that the Payment Supplement has been terminated and a detailed account of how the Payment Supplement funds were applied. (b) Permanent Home Retention Action Completed The Mortgagee must terminate the Payment Supplement when any subsequent Permanent Home Retention Option is executed by all required parties, except for a Standalone Partial Claim. (c) PFS, DIL, Foreclosure, and CWCOT The Mortgagee must terminate the Payment Supplement upon receipt of an executed ATP for PFS or when the foreclosure sale, CWCOT sale, or transfer of deed is completed. (d) Transfers and Assumptions The Payment Supplement is non-transferrable and not assignable to a new Borrower. Upon approval by the Mortgagee of the transfer or assumption, or when the Mortgagee receives actual or constructive knowledge of the transfer of ownership, the Mortgagee must terminate the Payment Supplement. (e) Sale (non-PFS) or Refinance If the Property is being sold or the Mortgage is being refinanced, the Mortgagee must: • provide the Payment Supplement payoff statement upon request; and • terminate the Payment Supplement upon completion of the sale or refinance. (2) Final Accounting of Payment Supplement No later than 45 Days after the date of completion or termination of the Payment Supplement, the Mortgagee must: • upload a final accounting of the Payment Supplement in SIP; and • input the amount of any funds remitted to HUD. The Mortgagee is not permitted to submit the final accounting until after remitting to HUD all remaining funds from the Payment Supplement Account, if any. The final accounting of the Payment Supplement is a document uploaded in SIP that must include: III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1248 Last Revised: 11/26/2025 • the amount that was used to bring the Mortgage current at the start of the Payment Supplement Period; • the total amount applied to MoPR payments; and • the amount of individual MoPR payments and the months for which they were applied. The Mortgagee must also input in SIP the amount of funds, if any, that have been remitted to HUD via Pay.gov in SIP. (3) Payment Supplement Payoff Statement The Mortgagee must issue Payment Supplement payoff statements until the final accounting of the Payment Supplement has been submitted to HUD. The Mortgagee must issue Payment Supplement payoff statements upon request and when the Mortgagee receives a payoff request for the Borrower’s first Mortgage. The Mortgagee must include in a Payment Supplement payoff statement, at a minimum: • the total amount due for the Payment Supplement, including itemizing: • the amount that was used to bring the Mortgage current at the start of the Payment Supplement Period; and • the total amount applied to MoPR payments; • a statement that the Payment Supplement is a subordinate lien in the name of the Secretary of HUD; • instructions that the payoff of funds owed under the Payment Supplement must be remitted to HUD via Pay.gov; • a statement that the payoff amount will change if additional account activity occurs including: • any payment made that triggers the application of a MoPR; and • returned payments due to a stop payment or insufficient funds; and • anything required by applicable laws. The Payment Supplement payoff statement must not include or reflect as a credit any remaining funds in the Payment Supplement Account. The Payment Supplement payoff statement must not include the balance of any additional outstanding Partial Claims. If HUD receives a request for a payoff statement of the Payment Supplement prior to receipt of the final accounting from the Mortgagee, HUD will provide the maximum amount available under the Payment Supplement and direct the requestor to contact the Mortgagee for the actual amount required to pay off the Payment Supplement. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1249 Last Revised: 11/26/2025 After completion or termination of the Payment Supplement and submission of the final accounting from the Mortgagee, the Mortgagee must not issue any payoff statements for the Payment Supplement. (4) Required Documentation The Mortgagee must retain a copy of the final accounting and, if applicable, the Payment Supplement payoff statement in the Servicing File. (L) Errors or Miscalculations of Funds Associated with Payment Supplement If the Mortgagee makes an error or miscalculates the Payment Supplement that results in: • a claim overpayment to the Mortgagee, the Mortgagee must remit the overpaid amount immediately to HUD via Pay.gov; or • a claim underpayment to the Mortgagee, the Mortgagee must absorb the cost of the error or miscalculation. If the Mortgagee makes an error or miscalculates the amount of funds remitted to HUD at the completion or termination of the Payment Supplement resulting in the Mortgagee remitting less than the total remaining funds in the Payment Supplement Account to HUD, the Mortgagee must remit any remaining outstanding funds in the Payment Supplement Account immediately to HUD via Pay.gov. The Mortgagee must include its review process for ensuring the accurate calculation of Payment Supplement in its QC Plan. vii. Outside of the Waterfall Loan Modification (A) Definition An Outside of the Waterfall Loan Modification (OWL) refers to a permanent change in one or more terms of a Borrower’s Mortgage that achieves a minimum reduction to the Borrower’s monthly Principal & Interest (P&I) payment where the Borrower has been unresponsive. (B) Eligibility The Mortgagee must ensure that: • the Borrower has been unresponsive to outreach by the Mortgagee during the Default episode; • final documents to complete a Loss Mitigation Option have not been sent to the Borrower during the Default episode; • the Borrower has not executed an agreement for a Permanent Home Retention Option or OWL in the past 24 months at the time the Permanent Home Retention Option is executed, except: III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1250 Last Revised: 11/26/2025 • a Borrower who received a PDMDA Home Retention Option or a COVID-19 Home Retention Option in the past 24 months remains eligible for an OWL; and • the OWL at the Market Rate will provide at least a $1.00 reduction to the P&I portion of the Borrower’s monthly Mortgage Payment as of the date the OWL begins; and • the Borrower receives at least one offer for an OWL per Default episode, if eligible. Non-Borrowers Who Acquired Title through an Exempted Transfer are not eligible for the OWL and must be evaluated for the other Permanent Home Retention Options. (1) Mortgage Status The Mortgagee must ensure that: • the Mortgage is 90 or more Days Delinquent; • a minimum of four Mortgage Payments have been paid by the Borrower on the Mortgage, except for Disaster Home Retention Options; • the first legal action to initiate foreclosure has not been completed; and • the arrearages do not exceed the equivalent of 12 months PITI. (2) Property Condition The Mortgagee must conduct any review it deems necessary, including a property inspection, when: • the Mortgagee receives notice from the Borrower, local government, or other third parties regarding adverse property condition; or • the Property may be affected by a disaster event. If the Mortgagee determines the property condition will adversely impact the long-term use of the Property or ability to support the debt, the Mortgagee is not required to review the Borrower for the OWL. (C) Standard The Mortgagee must review eligible Borrowers for an OWL. The Mortgagee must first review the Borrower for a 30-year Standalone Loan Modification at the Market Rate. If the minimum payment reduction is not met, the Mortgagee must review the Borrower for a 40-year Standalone Loan Modification at the Market Rate. The Borrower must successfully complete a TPP prior to execution of the Loan Modification documents for the OWL. The Mortgagee must ensure that the requirements for Trial Payment Plans are met. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1251 Last Revised: 11/26/2025 If the Borrower is eligible, the Mortgagee must prepare and provide a cover letter notifying the Borrower they are eligible for an OWL. The cover letter must explain the OWL and the TPP and include: • an explanation of terms including the modified Mortgage Payment amount; • that successful completion of a TPP is required as outlined in the TPP Agreement; • a statement that no lump sum payment is required; • a statement that the OWL is contingent on the Mortgagee’s review of title to ensure the FHA-insured Mortgage remains in first lien position; • a statement that the Borrower is encouraged to contact the Mortgagee to discuss other Loss Mitigation Options that may provide further payment reduction and to reinstate their Mortgage; • information for the Borrower to contact the Mortgagee; and • a statement that after successful completion of the TPP, the Borrower must sign and return the Loan Modification documents within 30 Days of receipt of the documents. The Mortgagee does not have to contact the Borrower prior to reviewing the Borrower for the OWL or sending out the cover letter and TPP Agreement for the OWL. The Borrower must sign and return the Loan Modification documents within 30 Days of receipt of the documents. (D) Terms The Mortgagee must ensure that: • the OWL at the Market Rate will provide at least a $1.00 reduction to the P&I portion of the Borrower’s monthly Mortgage Payment as of the date the OWL begins; • the modified Mortgage is a fixed rate Mortgage; • the OWL fully reinstates the Mortgage; and • the OWL only capitalizes arrearages, as calculated in Appendix 4.0, Part A: Arrearages. Mortgagees may include an additional month in the total outstanding debt to be resolved to allow time for the Borrower to return the executed Loan Modification documents before the modified Mortgage Payment begins. HUD does not provide a model document for the OWL. The Mortgagee must ensure the FHA-insured Mortgage remains in first lien position and is legally enforceable. III. SERVICING AND LOSS MITIGATION A. Title II Insured Housing Programs Forward Mortgages 2. Default Servicing Handbook 4000.1 1252 Last Revised: 11/26/2025 (E) Required Documentation For those Borrowers that were sent an offer for an OWL, copies of the cover letter, TPP Agreement, and Loan Modification documents must be retained in the Servicing File. Mortgagees are required to note in each individual Borrower’s file if the Borrower does not qualify for the OWL. viii. Permanent Home Retention Option Failure Is New Default If the Borrower is in Default following the use of a Permanent Home Retention Option, the Mortgagee must treat this as a new Default episode. ix. Loss Mitigation Assumption (A) Definition Loss Mitigation Assumption refers to the assumption of personal liability for repayment of the Mortgage in accordance with agreed loss mitigation terms by an occupying non-borrower who will be added to the Mortgage or who has acquired a title interest in a Property securing an FHA-insured Mortgage. (B) Standard The Mortgagee must ensure that the assumptor meets the criteria for approval of a Loss Mitigation Home Retention Option. All assumptors must have a valid SSN or EIN or meet the eligibility requirement exception regarding social security numbers. The Mortgagee must obtain the signature of each non-borrower assumptor on: • all associated written agreements for the approved Loss Mitigation Option; and • an assumption agreement that conforms with applicable state law for assumption of personal liability for repayment of the Mortgage in accordance with agreed loss mitigation terms. (C) Reporting a Loss Mitigation Assumption The Mortgagee must report Reinstated by Assumptor, Code 21, in SFDMS.

Source: FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Loss Mitigation Home Retention Options (12/30/2025) · source URL · snapshot 8c03836f77f317e1