Called the Payment Supplement, the option allows mortgage servicers to decrease a borrower’s mortgage payment by using funds from a “partial claim” — an interest-free second lien from the U.S. Department of Housing and Urban Development (HUD) to help homeowners catch up on their past due payments and get back to good standing. The partial claim, which would be for up to 30% of the outstanding balance of a borrower’s FHA loan, would be paid back when the homeowner sells the home, refinances or otherwise terminates the mortgage.

Funds from the partial claim would first be used to pay any overdue payments on the original mortgage. Any remaining funds in the partial claim would then be deposited in an FHA custodial account managed by the mortgage servicer, who would use those funds to temporarily supplement the monthly payments the borrower would make.

The goal, according to the FHA, is to reduce the borrower’s monthly principal and interest (P&I) payments by 25% for as long as the partial claim payment supplement is active. Per a mortgagee letter from HUD released on Wednesday, payment supplements will be active for a period of three years, after which the borrower resumes responsibility for paying the full monthly P&I amount.

“HUD uses every tool in our toolkit to ensure we can help struggling borrowers avoid foreclosure,” said HUD Secretary Marcia L. Fudge. “Today’s new policy will enable the families we serve to get back on their feet while staying in their homes.”

The rapid rise of interest rates for more than a year provided the impetus for the new program, according to FHA Commissioner Julia Gordon. The program was first discussed and publicized last spring, coming to fruition after a lengthy review process.

“FHA developed this innovative tool because after interest rates rose, the FHA Recovery Modification could no longer reliably provide payment reduction to borrowers facing a hardship,” she said. “Payment Supplement will bring borrowers current and temporarily reduce their monthly payments for up to three years, which we hope will enable them to weather their hardship and once again begin making their full mortgage payments.”

Servicers may begin implementing the Payment Supplement option on May 1, but must implement the solution for all eligible borrowers by Jan. 1, 2025.

The new plan has drawn praise from industry stakeholders, including Scott Olson, executive director of the Community Home Lenders of America (CHLA). The CHLA has long advocated for a similar program, sending a letter to the FHA requesting one in August 2022.

“CHLA applauds FHA Commissioner Gordon for instituting a new payment supplement partial claim,” Olson said. “This will help struggling homeowners who are behind on their mortgage payments to stay in their homes.”

“Prioritizing payment relief and reducing operational complexities were imperative, and we believe the improvements made following multiple rounds of feedback will ensure mortgage servicers have a new effective and efficient way to help struggling borrowers stay in their homes,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association. “As recommended, a longer implementation period of January 2025 … will further support servicers’ implementation efforts.”

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By understanding these hurdles and the financial tools available, potential homeowners can navigate the process more confidently and make informed decisions. One of the most significant barriers to homeownership is accumulating the initial downpayment.

For many aspiring homeowners, especially first-timers, saving this sum can feel like an impossible challenge. As property prices continue to soar, accumulating the funds for a downpayment or securing a mortgage with a less-than-stellar credit history can take time and effort.

Financial lifeline

Downpayment assistance programs represent a lifeline for those looking to bridge the gap between their savings and the required downpayment. These programs are financial aid initiatives designed to help potential homeowners cover the upfront purchasing cost. They aim to reduce the barrier of hefty downpayments while making homeownership more accessible.

There are a number of different types of downpayment assistance programs. Grants offer funds that a borrower doesn’t need to repay. It’s free money offered to qualified buyers to assist with their downpayment.

Low- or zero-interest loans are another form of downpayment assistance with minimal to no borrowing costs. Some of these loans might be forgivable after the borrower resides in the home for a specific duration. Deferred-payment loans allow for the repayment to be postponed for a set period, or until the property is sold or refinanced. Other programs might match the buyer’s contribution to the downpayment up to a certain amount, doubling their financial capacity.

There are hundreds of these downpayment assistance programs throughout the country. Federal, state and local governments often have initiatives to encourage homeownership, especially in certain neighborhoods, or for specific groups like veterans or first-time buyers. An example at the federal level are the homeownership vouchers through the U.S. Department of Housing and Urban Development.

Many nonprofit organizations, driven by a mission to promote community development and homeownership, offer downpayment assistance. Organizations like the National Homebuyers Fund or NeighborWorks America are notable examples. These bodies, which often work at the city or county level, have programs tailored to residents’ needs. They may focus on revitalizing certain neighborhoods or cater to local populations, such as teachers or public service workers.

Game-changing assist

While criteria can vary based on the source and type of downpayment assistance program, some common eligibility requirements include income restrictions or first-time homebuyer status. Others require homebuyer education or residence requirements.

Since many downpayment assistance programs are designed for low- to moderate-income buyers, applicants must fall below certain income thresholds to qualify. Some programs are exclusively for first-time homebuyers. It’s worth noting that “first time” often includes someone who hasn’t owned a home in the past three years.

To ensure informed homeownership, some programs require applicants to complete a homebuyer education course. Most of these programs require the purchased property to be the buyer’s primary residence, meaning that investment properties typically don’t qualify. There might be limits on the property’s purchase price to ensure the program caters to those who need it most.

Downpayment assistance programs can be a game changer for aspiring homeowners, turning their dream into tangible reality. By understanding the nuances of these programs, mortgage originators can help potential homeowners navigate options more confidently and take a significant step closer to holding the keys to their new home.

Dynamic combination

When you mix downpayment assistance with an FHA loan, you create a synergy that can turn homeownership dreams into reality. These financing tools forge a dynamic combination that can have a transformative impact on the lives of new homeowners.

The primary advantage of an FHA loan is lenient criteria. With lower downpayments and flexible credit requirements, these products already pave a smoother path to homeownership. Add to that the benefit of downpayment assistance and you have a solution that significantly reduces the upfront costs of buying a home.

FHA loans have democratized the homeownership process, ensuring it’s not just a privilege for those with hefty savings or impeccable credit scores.By combining an FHA loan with downpayment assistance, the initial financial strain is reduced, allowing a buyer to focus on their monthly mortgage payment and other homeownership expenses.

Rewarding journey

While the path to homeownership — especially with tools like FHA loans and downpayment assistance — can seem labyrinthine, the proper knowledge and approach can make it a rewarding journey. Equip your clients with the right insights, remain diligent, and you’ll soon find them holding the keys to their dream abode. Remember, every homeowner was once a first-time applicant.

Even the reduced downpayment of an FHA loan can be daunting for many. But downpayment assistance paired with an FHA loan can bridge the financial gap. Together, these tools weave a narrative of empowerment, inclusivity and hope.

They symbolize a nation’s commitment to ensuring that every individual, irrespective of their financial standing or past credit mistakes, has a shot at the American dream of owning a home. From young couples stepping into their first homes, to single parents providing stable environments for their children, to retirees finding comfort in their golden years, FHA loans and downpayment assistance programs resonate in every corner.

●●●

At the crossroads of dreams and reality, it’s heartening to know that tools like FHA loans and downpayment assistance programs are ready to guide, support and unlock doors. They are more than just financial instruments; they are enablers of dreams, testaments to resilience and pillars of communities. With these tools in hand, the path ahead is promising and achievable. ●

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That’s up from $472,030 in 2023, an increase of more than $26,000 that is driven by persistently strong home price growth nationwide over the course of the past year.

“The statutory loan limit increases announced today reflect the continued rise in home prices seen throughout most of the nation in 2023,” Federal Housing Commissioner Julia Gordon said. “The increases to FHA’s loan limits will enable homebuyers to use FHA’s low-downpayment financing to access homeownership at a time when a lack of affordability threatens to shut well-qualified borrowers out of the market.”

The FHA is mandated to set loan size limits each year by the National Housing Act (NHA), as amended by the Housing and Economic Recovery Act of 2008 (HERA). The NHA requires the FHA to set its limits based on the national conforming loan limit set by the Federal Housing Finance Agency (FHFA) for mortgages guaranteed by Fannie Mae and Freddie Mac. In 2024, the national conforming loan limit for a one-unit property is $766,550, and the FHA loan floor is set at 65% of the conforming loan limit.

The floor applies to so-called “low-cost” areas — counties where 115% of the median home price is less than the floor limit. Any area where that threshold is surpassed is deemed a “high-cost” area, meaning that varying loan limits above the floor for these areas are set by the FHA based on local median home prices.

The NHA also requires the FHA to set a maximum loan amount, or ceiling, of 150% of the national conforming loan limit for these high-cost areas. In 2024, the ceiling for a one-unit property is set at $1,149,825. Additionally, there are some areas where loan limits are determined differently due to factors such as construction costs. These include Alaska, Hawaii, the U.S. Virgin Islands and Guam; in these areas, the 2024 loan limit for a one-unit property is $1,724,725.

Maximum loan limits are set to rise in 3,138 counties nationwide, while another 96 counties will see no change. The new loan limits are effective for FHA case numbers assigned on or after Jan. 1, 2024.

The FHA has different limits for properties with two units or more. To find a complete list of FHA loan limits, visit FHA’s Loan Limits Page.

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FHA loan count is among the data points reported by HUD and FHA to Congress following every quarter of the fiscal year. In the fourth quarter of last year (which is concurrent to the first quarter of federal fiscal year 2023), the FHA backed 179,152 mortgages, down from 216,036 in the prior quarter. It was the sixth straight quarterly decrease in FHA loan endorsements since the current cycle peak was reached in Q2 2021.

In terms of dollar volume, FHA loans in Q4 2022 totaled $49.1 billion, down 17.5% quarter over quarter.

The FHA attributed the most recent decrease to the continued rise of interest rates, with the average 30-year fixed mortgage rate climbing above 7% in late October and early November. Notably, according to the Mortgage Bankers Association (MBA), mortgage credit availability also fell during the fourth quarter to its lowest level since March 2013. In December 2022, the FHA and U.S. Department of Veterans Affairs saw a 23% year-over-year decline in credit availability, per the MBA’s Mortgage Credit Availability Index.

Both purchase and refinance loan count fell during the last three months of 2022. Purchase activity was down 16.3% quarter over quarter, while FHA-to-FHA refinance endorsements were down 28% and conventional-to-FHA refinances fell 10.6%.

With interest rates high and minimal incentives to refinance, purchase loans continued to dominate total lending activity. Purchase loans comprised a 78.6% share of all FHA mortgages during the fourth quarter, up from 77.9% in Q3 2022 and well above the 65.9% share in Q4 2022. The purchase share of all FHA loans is now at its highest level since mid-2018, when it briefly climbed above 80%.

Reverse mortgage activity at the FHA is down as well, with the count of HECM endorsements during Q4 2022 at 9,555. That’s down 31.1% quarter over quarter, with HECM endorsement dollar volume shrinking by 34%.

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The change was first announced in April of last year and was originally meant to assist borrowers who were behind on their mortgage due to the COVID-19 pandemic. Designed to be used in conjunction with the FHA’s partial claim option, the new loss-mitigation program is aimed at helping borrowers who can’t achieve a 25% reduction in the principal and interest portion of their mortgage payment through the FHA’s current 30-year loan modification.

Stretching the term limit to 480 months from 360 months, according to the FHA, will allow borrowers to further reduce their monthly payments, give them a better chance to get their loans current and avoid losing their homes. While 40-year mortgages remain rare, they have become more common, including via loans backed by Fannie Mae and Freddie Mac, as well as loan modifications offered by Ginnie Mae and the U.S. Department of Agriculture.

Per the original rule proposal published in the Federal Register, HUD believes that a 40-year loan modification could prevent “several thousand borrowers a year” from entering foreclosure.

While borrowers who choose a 40-year loan modification would be subjected to a slow pace of equity growth along with additional interest payments over the course of the extended term, HUD stated that such drawbacks are outweighed by the opportunity for borrowers to retain their homes through a more sustainable payment plan. And comments solicited by HUD during a public feedback period noted that current adverse market conditions, including the rising interest rate environment, have heightened the importance of creating additional tools to help struggling borrowers.

Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), lauded the adoption of the final rule.

“This additional tool will allow mortgage servicers to help struggling FHA borrowers stay in their homes through a more affordable and sustainable mortgage payment,” Broeksmit said.

“Adding the 40-year loan modification to FHA’s loss-mitigation toolkit creates better alignment across the government and with Fannie Mae and Freddie Mac, a longstanding MBA priority that we most recently recommended in our new white paper on the future of loss mitigation. Better alignment will improve consumer experience and lead to consistency and simplicity when addressing adverse market conditions, national emergencies and natural disasters.”

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The move, which specifically reduces premiums from 0.85% to 0.55% of the loan amount, will apply to almost all Single Family Title II forward mortgages insured by the FHA. Premium cuts will officially take effect on March 20. Eligible property types include single-family homes, condominiums and manufactured homes.

According to HUD, the reduction will save $800 a year for the average FHA borrower with a $265,000 mortgage on a single-family home. For an FHA borrower with a mortgage of $467,700 (the national median home price in December 2022), they’ll save more than $1,400 in the first year of the loan. An estimated 850,000 current homeowners and future buyers will save from the reductions over the coming year, per HUD’s statement.

Reducing the MIP also can help more applicants qualify for mortgages, HUD said.

“At a time when budgets are tight and homeownership is out of reach for too many, FHA’s premium reduction will allow more households to access the stability and wealth creation of homeownership, particularly the first-time homebuyers and families of color who rely heavily on affordable FHA-insured mortgages,” said Julia Gordon, HUD’s assistant secretary for housing and federal housing commissioner. “For many families, the savings will make the difference in their ability to purchase the home of their choice.”

The reduction comes as part of an ongoing plan from the Biden administration to advance its stated goal of promoting housing stability and affordability. A statement from the White House explained that cuts were made possible due to the accumulation of FHA’s mortgage insurance fund reserves, which are currently at more than five times the required threshold set by Congress.

“For this country to truly succeed, all Americans must have access to opportunity. That means expanding access to wealth building and homeownership,” HUD Secretary Marcia L. Fudge said. “Today we are building on the steps we’ve taken to make homeownership more affordable, and HUD is acting to ensure people feel comfortable purchasing a home as they build toward their future. As we reduce housing costs for people with FHA mortgages, we continue our work to address long-standing disparities in homeownership.”

The move was met with praise from many within the mortgage lending community.

“The lower premiums will expand homeownership opportunities by lowering mortgage payments for qualified FHA borrowers, providing critical relief from the steep rise in mortgage rates and home prices just in time for the spring buying season,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association. “This will especially help minority homebuyers and low- and moderate-income households who are predominantly served by FHA loans.”

“CHLA strongly commends the Biden administration and FHA Commissioner Gordon for today’s announcement that FHA is cutting premiums,” said Scott Olson, executive director of the Community Home Lenders of America. “Long a top CHLA priority, an FHA premium cut is critically needed to ensure minorities and other underserved borrowers have affordable access to mortgage credit in a period of rising mortgage rates and homeownership affordability challenges.”

Not all industry observers, however, were in support of the premium cuts. Tobias Peter, assistant director of the American Enterprise Institute (AEI) Housing Center, called the move the beginning of “another pointless government mortgage pricing war.”

“When the inventory of homes for sale is tight, credit easing cannot bring in many new buyers since there are already too many buyers chasing too few homes,” Peter wrote on AEI’s blog. “However, credit easing will cause the surplus of buyers to use their newly minted buying power to bid up the price of houses.”

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If a borrower has fallen into the ‘derogatory credit’ category, a lender may look at their credit history to see if it was acceptable prior to the presidentially declared major disaster.

Rebuilding communities

Understandable hardships

Flexible guidelines

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Meant to be used in conjunction with the FHA’s partial claim option, the new loss-mitigation program is aimed at helping borrowers who can’t achieve a 25% reduction in the principal and interest portion of their mortgage payment through the FHA’s current 30-year loan modification. Stretching the term limit to 480 months from 360 months, according to the FHA, will allow borrowers to further reduce their monthly payments, give them a better chance to get their loans current and avoid losing their homes.

The modification was first proposed on April 1 and a public comment period on the rule is open until May 31. Per the rule proposal published in the Federal Register, the U.S. Department of Housing and Urban Development (HUD) believes that a 40-year loan modification could prevent “several thousand borrowers a year” from entering foreclosure. And while borrowers who choose a 40-year loan modification would be subjected to a slow pace of equity building along with additional interest payments over the course of the extended term, HUD stated that such drawbacks are outweighed by the opportunity for borrowers to retain their homes through a more sustainable payment plan.

Servicers of mortgages backed by the FHA can offer the modification immediately, and they must begin offering it as an option to eligible borrowers within 90 days.

“Over the last year we have made substantive changes to our COVID-19 recovery options that are showing strong results in helping homeowners with FHA-insured mortgages recover from the devastating financial effects of the pandemic,” said Lopa P. Kolluri, principal deputy assistant secretary for the FHA’s Office of Housing.

“Adding a 40-year modification with partial claim to our toolkit for servicers today reaffirms our long-term commitment to continue helping as many struggling homeowners as we can to keep their homes.”

Currently, only borrowers who were affected financially by the COVID-19 pandemic are eligible to apply for the modification, although the FHA appears to be considering making the option a permanent addition to its loss-mitigation policies. The FHA noted in a statement that the 40-year modification is consistent with similar provisions available from others in the mortgage industry, including Fannie Mae and Freddie Mac.

Not all FHA loans will qualify for the 40-year option. Some loans funded via mortgage revenue bonds, for example, may not be eligible. According to a letter from HUD, this is to ensure that mortgages that rely on such bonds — particularly those offered by state housing-finance agencies — remain in compliance with the terms of their bond agreements and their restrictions through the Internal Revenue Service code.

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Implemented in 2017, the LRS is one of the FHA’s newest technological innovations, an electronic platform that lenders use to interact with the agency for quality control on most Title II single-family mortgages — the bulk of the FHA’s volume. Processes that lenders access LRS to perform include post-endorsement loan reviews, lender monitoring reviews and self-reporting of fraud.

According to the U.S. Department of Housing and Urban Development website, the system automates several manual processes and communications, streamlines submission of required documents, enhances loan quality reporting and analytics, and organizes requests for lender responses.

Efforts to resolve the errors experienced by users of late have had “mixed results,” according to a communication issued by the FHA this week. This led to the agency shutting down LRS on Monday, April 11, while “system teams continue to troubleshoot the issue.” Shutting down the system, the FHA said, “will minimize the need for lenders to resubmit response documents once the errors are resolved.”

The FHA projects that LRS access will return no later than April 25. The agency will reset response due dates and “make other appropriate adjustments” to make sure that lenders are not adversely impacted by the shutdown. Lenders with questions about the shutdown, as well as those with specific requests once access to LRS is restored, can contact the FHA Resource Center through email at answers@hud.gov and via phone at 1-800-CALLFHA.

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HUD initially announced the moratoria on March 18 last year, extending it five times afterward to help keep borrowers in their homes during the dire economic straits of the COVID-19 pandemic. The move follows suit with the Federal Housing Finance Agency (FHFA), which recently announced an extension of moratoria for loans backed by Fannie Mae and Freddie Mac until March 31. Similar extensions of moratoria regarding loans backed by the U.S. Department of Agriculture (USDA) and Department of Veteran Affairs (VA) have also been announced; those suspensions will now likewise last until June 30. 

The moratorium extension is one of a flurry of changes announced by HUD to aid American homeowners still financially burdened by the ongoing COVID crisis. An extension was also announced to the initial start date of a COVID-19 forbearance, giving borrowers who have been impacted by the pandemic until June 30 to request the start of a forbearance period. Furthermore, COVID-19 forbearances have been expanded to allow up to two extensions of up to three months each.

HUD is also allowing more borrowers access to COVID-19 loss mitigation options by expanding the FHA’s home rentention and home disposition programs to all borrowers who are behind on their mortgage payments by at least 90 days. This expansion, according to a release from HUD, will require mortgage servicers to assess more homeowners for a streamlined waterfall of loss mitigation home retention options, starting with FHA’s COVID-19 Standalone Partial Claim.

Finally, to help seniors carrying home equity conversion mortgages (HECMs) insured by the FHA, the timeframe for the start of an initial COVID-19 HECM extension has been extended to June 30. Two additional HECM extensions of up to three months each have also been provided.

“HUD believes these additional measures will provide mortgagees a better toolbox with which to assist borrowers in recovery from the impacts of the pandemic,” according to a mortgagee letter from HUD. “HUD believes that the extension of these moratoria, in addition to the increased eligibility of borrowers for loss mitigation, will help marginalized communities that have been disproportionately impacted by the COVID-19 pandemic.”

“As President Biden has made clear, it is urgent that we help homeowners throughout the nation who are struggling financially from this unprecedented national emergency,” said acting HUD Secretary Matthew Ammon. “The steps we are taking today will provide both immediate relief to those in desperate need of assistance and help more homeowners keep their homes and resume their payments when the pandemic subsides.”

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