What are the requirements for accepting partial payments for an FHA-insured mortgage in default?

Unless subject to the exceptions in the “Return of Partial Payments for Mortgage in Default” section listed below, the Mortgagee must accept any Partial Payment and either:
  • apply the payment to the Borrower’s account; or
  • identify the payment with the Borrower’s account and hold the payment in a suspense account. When a full monthly installment due under the Mortgage is accumulated, the Mortgagee must apply that amount to the Borrower’s account.
Application of Partial Payments Totaling a Full Monthly Payment
When Partial Payments held for disposition total a full monthly payment, the Mortgagee must apply these payments to the Borrower’s account, after deduction of amounts due to the Mortgagee for Late Charges and refunds of Mortgagee advances. This application of Partial Payments as a full monthly installment advances the date of the oldest unpaid installment, but not the date on which the account first became Delinquent.
When applying the Partial Payment totaling a full monthly payment, the Mortgagee must:
  • report the appropriate Status Code in the Single Family Default Monitoring System (SFDMS);and
  • advance the Oldest Unpaid Installment (OUI) date one month.
Return of Partial Payments for Mortgage in Default
If the Mortgage is in Default, the Mortgagee may return the Partial Payment to the Borrower with a letter of explanation only under the following circumstances:
  • when the payment represents less than half of the full amount then due;
  • when the payment is less than the amount agreed to in an oral or written Forbearance Plan;
  • when the payment is less than the amount stated in an approved Trial Payment Plan (TPP) Agreement, whether or not an executed Agreement is received by the Mortgagee;
  • when the Property is occupied by a rent-paying tenant and the rents are not being applied to the Mortgage Payments;
  • when foreclosure has been started; or
  • when it is 14 Days or more after the Mortgagee has mailed a statement to the Borrower, with the full amount due, including Late Charges, which advises that it intends to refuse to accept future Partial Payments (see Application of Subsequent Payment to Unpaid Late Charges – Section III.A.2.d.ii.(B)), and either of the following conditions have occurred:
    • four or more full monthly installments are due but unpaid; or
    • a delinquency of any amount, including Late Charges, has continued for at least six months since the account first became Delinquent.
The Mortgagee must ensure that its servicing file reflects any Partial Payments returned to the Borrower and includes any letters of explanation for the returned payments.

Any questions may be directed to the FHA Resource Center Toll-Free Telephone Number at (800) CALLFHA (225-5342) or by email to answers@hud.gov.  Persons with hearing or speech impairments may reach this number by calling the Federal Relay Service at (800) 877-8339. 
See policy in Handbook 4000.1 Section III.A.2.e.i.-iii.  at: https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-03972