FHA proposes simpler partial claim process
FHA is considering a new way to manage partial claims that could reduce paperwork and help prevent delays when homeowners sell, refinance or transfer a property.
A proposed change to a FHA mortgage relief program could help prevent an old partial claim from becoming an unexpected obstacle when a homeowner is ready to sell.
Partial claims help FHA borrowers catch up on missed mortgage payments and avoid foreclosure. The money advanced on the homeowner’s behalf is typically recorded as a separate, interest-free lien that must be repaid when the home is sold, refinanced or the original mortgage is paid off.
The Federal Housing Administration is proposing a different approach. Instead of creating a separate lien, the repayment obligation would be documented through the homeowner’s existing FHA-insured mortgage.
The five-year demonstration program would be known as the Reinstatement Advance Payment, or RAP.
For real estate agents, the biggest potential benefit is a simpler path to closing. Partial claims can sometimes surface during the title and payoff process, requiring additional paperwork and coordination with HUD before a sale can move forward.
The proposed change would not erase the homeowner’s debt. The outstanding amount would still have to be identified and repaid. However, there would no longer be a separate second lien that must be resolved and released.
FHA said the proposal would help “facilitate the sale, refinance, assumption, and transfer processes as there will no longer be a subordinate lien to resolve.”
The RAP option could be used with a standalone partial claim, a partial claim combined with a loan modification or an FHA Payment Supplement.
For homeowners, the mortgage relief would work much the same way. The amount would remain interest-free, with repayment generally postponed until the home is sold, transferred or refinanced, the first mortgage is paid off or reaches maturity, or FHA mortgage insurance ends.
Homeowners also could pay some or all of the balance early without a penalty.
The proposal is also a reminder for agents to ask sellers early in the process whether they received mortgage relief or entered a loss-mitigation program. Bringing the title company and lender into the conversation before a partial claim appears in a title search could help avoid delays later.
The proposal is not final. FHA is accepting public comments through Sept. 3.
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