COVID-19: How is a borrower impacted when using a Forbearance due to a Presidentially-Declared major disaster or due to COVID-19?

When a borrower experiences significant reduction in income due to either a Presidentially-Declared major disaster, or some other hardship including the COVID-19 National Emergency that may prevent them from making the required mortgage payment under the terms of the Mortgage and Note, servicers may offer the borrower a Mortgage Payment Forbearance Plan as one of the Home Retention Options to avoid foreclosure. Forbearance Plans are arrangements between a Mortgagee and Borrower that may allow for a period of reduced or suspended payments and may provide specific terms for repayment. 
 
HUD recognizes the adverse impacts of such extenuating circumstances on borrowers’ ability to recover and resume meeting their financial obligations and that, upon successful completion of the Forbearance, there may be the need and the opportunity for the borrower to refinance the existing mortgage to a lower interest rate thereby lowering the monthly mortgage payment, or to a shorter term. Additionally, borrowers may seek to purchase another property in accordance with FHA eligibility requirements. To maintain the stability of the Mutual Mortgage Insurance Fund (MMIF), while concurrently aiding the housing market generally, FHA is expanding its underwriting guidelines to address Housing Obligations/Mortgage Payment History requirements for borrowers who were granted a Forbearance and are now seeking FHA-insured financing.
 
Generally, a borrower who was granted Mortgage Payment Forbearance is eligible for a new FHA-insured mortgage provided:

  1. The borrower continued to make regularly scheduled payments and the Forbearance Plan is terminated, or
  2. For Cash-Out refinances, the borrower has completed Forbearance and made at least 12 consecutive monthly payments post-forbearance; or
  3. For Purchase and No Cash-Out refinances, the borrower has completed Forbearance Plan and made at least three consecutive monthly payments post-forbearance; 
  4. For Credit Qualifying Streamline refinance, the borrower has completed Forbearance Plan and made less than three consecutive monthly payments post- forbearance;  
  5. For all Streamline refinance transactions, the borrower has made at least six payments on the FHA-insured mortgage being refinanced (Where the FHA insured Mortgage has been modified after forbearance, the Borrower must have made at least six payments under the Modification).

For additional information see Mortgage Letter 2020-30 available at: https://www.hud.gov/program_offices/administration/hudclips/letters/mortgagee
 

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-05577