What Is a Partial Claim Mortgage and How Does It Work?

A partial claim mortgage serves as a foreclosure prevention option for homeowners struggling with mortgage payments due to temporary financial hardships. This mechanism provides a pathway to bring a delinquent mortgage current, allowing individuals to maintain their residence. It is designed to alleviate immediate financial strain caused by unforeseen circumstances, helping to stabilize housing situations.

Understanding Partial Claim Mortgages

A partial claim mortgage is an interest-free loan provided by the Department of Housing and Urban Development (HUD) to help homeowners bring their FHA-insured mortgage current. It is not a modification of the original mortgage terms, but rather a separate financial arrangement. This loan covers past-due amounts, including principal, interest, taxes, and insurance, which have accumulated due to a temporary financial hardship. The funds are advanced by the mortgage servicer on behalf of HUD directly to the lender.

The amount advanced through a partial claim becomes a subordinate lien on the property. This means it is a second lien that is junior to the original mortgage. The homeowner signs a promissory note for this amount, acknowledging the debt. Crucially, this subordinate lien does not require monthly payments.

Repayment of the partial claim is typically deferred until a specific triggering event occurs. These events commonly include the sale of the home, refinancing the original mortgage, or the maturity of the first mortgage. The purpose of this structure is to resolve the immediate delinquency without increasing the homeowner’s monthly mortgage obligation, thus helping to avoid foreclosure.

While it is a loan, its non-interest-bearing nature and deferred repayment structure make it distinct from a traditional second mortgage. It serves as a bridge to allow homeowners to regain financial stability and resume their regular mortgage payments on the primary loan.

Eligibility for a Partial Claim

Eligibility for a partial claim mortgage is contingent upon meeting specific criteria, primarily for homeowners with FHA-insured mortgages. The property must typically be the borrower’s primary residence. This ensures the assistance is directed towards owner-occupied homes facing genuine housing instability.

A fundamental requirement is experiencing a legitimate, documented temporary financial hardship that led to the mortgage delinquency. This hardship could stem from various unforeseen circumstances, such as a job loss, illness, or other significant income disruption. The hardship must be temporary, indicating that the homeowner has recovered or is expected to recover financially and can resume making their regular mortgage payments after the partial claim resolves the past-due amount.

Homeowners usually need to be delinquent on their mortgage payments for a certain period, often at least four months, to qualify. While the specific number of months can vary, it generally applies to those behind on several payments but not yet in advanced foreclosure proceedings. The servicer will evaluate the borrower’s financial situation to confirm their ability to resume full, on-time payments.

The outstanding principal balance of the partial claim cannot exceed a specified percentage of the total mortgage amount. For FHA-insured mortgages, this typically cannot exceed 30% of the unpaid principal balance at the time the first claim is initiated. This limit helps ensure the program’s viability and long-term affordability for the homeowner.

The Partial Claim Application Process

Initiating the partial claim application process begins with gathering necessary financial documentation. Homeowners should collect recent pay stubs, bank statements, and tax returns for the past one or two years to provide a clear picture of their income and assets. A crucial component is a hardship letter, which explains the specific temporary financial difficulty that caused the mortgage delinquency.

Once these documents are assembled, the next step involves contacting the mortgage servicer. Homeowners can reach out via phone, through an online portal, or by mail to discuss their financial situation and inquire about the partial claim option. The servicer will then provide specific forms and instructions for completing the application.

Upon submission of the complete application package, the mortgage servicer begins a thorough review process. This involves evaluating the documented financial hardship, analyzing the homeowner’s current income and expenses, and assessing their ability to resume regular mortgage payments. The servicer determines whether the homeowner meets all the eligibility criteria for a partial claim.

Potential outcomes include approval or denial. If approved, the homeowner will be required to sign a partial claim promissory note and a subordinate mortgage. These legal documents formalize the interest-free loan from HUD and establish the second lien on the property. Following the signing, the servicer applies the partial claim funds directly to the delinquent amount, bringing the primary mortgage current.