FHA Loss Mitigation: Partial Claim, Modification, and Appeals

If you have an FHA-insured mortgage and you’ve fallen behind, your servicer is required to walk you through a defined set of FHA loss mitigation options before it can foreclose. The options run from short-term fixes like a repayment plan or forbearance, to a partial claim that moves your past-due balance into a zero-interest second lien, to a loan modification that rewrites your rate and term, to a combination of the two. If none of those keep you in the home, the servicer must still consider a pre-foreclosure sale or deed-in-lieu before taking the house. HUD sets the order, and federal regulations give you concrete protections while the review is underway.

The Order Your Servicer Must Follow

FHA servicers do not get to pick a favorite option. HUD requires them to work through a fixed sequence, called the waterfall, and move to the next step only after documenting why the previous one won’t work. The options higher on the list are the least disruptive; the ones at the bottom involve giving up the home.

Repayment plan, if you’re no more than 120 days behind and can catch up within 24 months.
Forbearance, if you need a temporary pause or reduction before resuming your regular payment.
Standalone partial claim, if you can resume your current payment but need the arrears resolved without changing the loan.
Standalone loan modification, if a new rate and term alone can get you to an affordable payment.
Combination loan modification and partial claim, if a modification by itself can’t reach the target.
Payment supplement, if nothing above works and you qualify for a temporary subsidy.
Home disposition — pre-foreclosure sale or deed-in-lieu — before foreclosure itself.

If your situation fits an option higher on the list, that is what you should be offered.

Who Qualifies

A few baseline rules apply across every home-retention option. The property must be your principal residence; FHA mortgage insurance covers owner-occupied homes only, so rentals and vacation homes are out.¹ You generally need to be at least 61 days delinquent — three or more full monthly payments due and unpaid — for most permanent retention options, and some specific programs require 90 days.² And you can receive only one permanent home-retention option (partial claim, modification, combination, or payment supplement) within any 24-month window, unless you’re affected by a presidentially declared major disaster.³

You also need a qualifying hardship, documented on a hardship affidavit. HUD recognizes unemployment, a reduction in income from circumstances outside your control, an increase in housing-related expenses, a natural or man-made disaster, long-term disability or serious illness of a borrower or dependent, divorce or legal separation, separation of co-borrowers who aren’t married or partnered, death of a borrower or wage earner, and military Permanent Change of Station orders. Servicers consider whether the hardship is temporary, long-term, or permanent, and that assessment shapes which waterfall options are on the table for you.⁴

How an FHA Partial Claim Works

A partial claim is the quietest tool in the set. Your loan terms don’t change. Instead, HUD advances the money needed to bring the mortgage current, the servicer applies it to your arrears, and you sign a new promissory note and a subordinate lien in favor of HUD. That second lien carries zero interest and requires no monthly payments while you live in the home.⁵

The amount is capped at 30 percent of your unpaid principal balance as of the date you first went into default. That cap is lifetime: any previous partial claims count against it.²

The partial claim becomes due when you make your final mortgage payment, sell the property, transfer the title, allow someone to assume the loan, or refinance.³ Because it’s recorded with your local county recorder, it will show on a title search until it is paid off. For most borrowers, that happens from sale proceeds down the road.

A standalone partial claim is only on the menu when you can attest you’re able to resume your current mortgage payment going forward. If current income can’t support even the original payment, the servicer moves down the waterfall.

How an FHA Loan Modification Works

A loan modification rewrites the mortgage so the monthly payment lands at a level you can sustain. The target is roughly 31 percent of your gross monthly income, though the servicer may approve a higher ratio (up to 40 percent) when the lower target can’t be reached.

The servicer first capitalizes your arrears: past-due interest, late fees, and escrow shortages roll into the new principal balance. That brings the loan current but increases what you owe. The interest rate is then adjusted to the current FHA market rate. If a 360-month term at that rate reaches the target payment, you get a standard 30-year modification. If it can’t, the servicer re-runs the numbers over a 480-month term. The longer amortization lowers the monthly payment further at the cost of more total interest over the life of the loan.²

The 30-year option has to be tested first. The servicer only moves to the 40-year term when the shorter period can’t deliver at least a 25 percent reduction in the principal and interest portion of your payment.⁶ The result is a new promissory note and a recorded modification agreement that supersedes your original payment terms.

Combination Modification and Partial Claim

When a modification alone cannot reach the target, the servicer combines the two tools. Part of what you owe gets deferred into the zero-interest subordinate partial-claim lien, and the remaining balance gets modified at an adjusted rate and term. The servicer tries a 30-year combination first, moving to 40 years only if the shorter term can’t produce a 25 percent principal-and-interest reduction. The partial-claim portion still can’t exceed 30 percent of the unpaid principal balance.²

This is often where the math works for a borrower with both significant arrears and reduced income. The partial claim takes a bite out of the back-owed amount; the modification restructures what’s left into a payment you can carry.

The Trial Payment Plan

Before any modification (standalone or combination) becomes permanent, you have to complete a trial payment plan at the proposed new amount. The standard trial is three months. Non-borrowers who took title through an exempt transfer, such as inheritance, must complete six months.⁷

Treat the trial as pass/fail. A missed payment, or one more than 15 days late, breaks the plan.⁸ If the trial fails, the servicer gets another 90 days to either begin foreclosure or evaluate you for a different option, but the options available after a failed trial are typically narrower than what you had before.

Applying and the Timelines That Follow

You start by submitting a Request for Mortgage Assistance to your servicer’s loss mitigation department along with income and expense documentation. Use the servicer’s secure portal if there is one; if you’re mailing paper, send it certified with return receipt and keep a complete copy. “We never received it” is the single most common servicer response when things slip.

Federal regulations put the servicer on a clock. Within five business days of receiving your application, it must send written acknowledgment telling you whether the file is complete or what’s missing. Fix any gaps right away, because the evaluation clock does not start until the file is complete. Once the servicer has a complete application more than 37 days before any scheduled foreclosure sale, it has 30 days to evaluate you for every available loss mitigation option and send a written determination.⁹

Foreclosure Protection While Your Review Is Pending

Under Regulation X, if you submit a complete application more than 37 days before a scheduled foreclosure sale, the servicer cannot seek a foreclosure judgment or conduct a sale until it denies you in writing and any appeal period passes, you reject all options offered, or you fail to perform under one you accepted.⁹

The 37-day threshold matters. If a sale is already scheduled within 37 days and your complete application isn’t in yet, this protection doesn’t apply. The practical lesson is to start on your paperwork the moment you fall behind. Early applications give you the widest range of options and the strongest procedural protection.

Appeal Rights After a Denial

If the servicer denies you a loan modification, you can appeal in writing within 14 days of the determination notice. Different personnel from those who issued the denial must handle the appeal, and the servicer has 30 days from the date of the appeal to issue a new decision. If the appeal produces an offer, you’ll get at least 14 days to accept or reject it. The appeal decision is final under the regulation; there is no second appeal.⁹

One catch: the appeal right only applies when the servicer received your complete application at least 90 days before a scheduled foreclosure sale. Another reason to file early.

Taxes and Credit, Briefly

A partial claim doesn’t create a tax event. The debt is deferred, not canceled, so you still owe it. Taxes come up if any portion of your mortgage is actually canceled, such as through a principal reduction, because canceled debt is generally treated as taxable ordinary income by the IRS.¹⁰ An exclusion for canceled qualified principal residence indebtedness has been available for years but was set to expire for debts discharged after January 1, 2026, unless the arrangement was entered into and evidenced in writing before that date. Whether it has been made permanent depends on action in Congress. If the exclusion applies, Form 982 is used to claim it. Check with a tax professional before assuming any canceled amount is tax-free, especially for modifications executed in 2026 or later.

On credit reporting, FHA doesn’t dictate how a completed modification is coded. Servicers must comply with the Fair Credit Reporting Act and report accurately. In practice, most report the account as current once the modification is executed, but the prior delinquency history remains on your report for seven years. The modification doesn’t erase what already happened; it stops it from getting worse and lets your credit begin recovering from that point.

Free Help From a HUD-Approved Counselor

HUD-approved housing counseling agencies provide foreclosure prevention counseling at no cost. A counselor can help you understand the waterfall as it applies to your numbers, organize your documentation, and push back when a servicer is unresponsive or slow. You can find a local agency through HUD’s counseling directory at answers.hud.gov/housingcounseling.³

1
U.S. Department of Housing and Urban Development (HUD). HUD Handbook 4000.1 – FHA Single Family Housing Policy Handbook
2
U.S. Department of Housing and Urban Development. Mortgagee Letter 2025-06 – Updates to Servicing, Loss Mitigation, and Claims
3
U.S. Department of Housing and Urban Development (HUD). FHA’s Loss Mitigation Program
4
U.S. Department of Housing and Urban Development (HUD). Mortgagee Letter 2025-06 – Updates to Servicing, Loss Mitigation, and Claims
5
eCFR. 24 CFR 203.371 – Partial Claim
6
U.S. Department of Housing and Urban Development. Mortgagee Letter 2025-12 – Updates to Loss Mitigation Calculations
7
U.S. Department of Housing and Urban Development. Dear Lender Letter 2026-03 – Rescission of COVID-19 Loss Mitigation Options and Updated Loss Mitigation Options
8
U.S. Department of Housing and Urban Development. Mortgagee Letter 2011-28 – Trial Payment Plan for Loan Modifications and Partial Claims
9
eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures
10
Internal Revenue Service. Topic No. 431 – Canceled Debt, Is It Taxable or Not?