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

A partial claims mortgage offers a pathway for homeowners to navigate financial difficulties and avoid foreclosure. This mortgage assistance program helps individuals bring their mortgage payments current by deferring a portion of past-due amounts. It serves as a tool to stabilize housing situations during periods of economic strain, addressing delinquency without immediate significant financial outlays from the homeowner.

Understanding Partial Claims Mortgages

A partial claims mortgage is a loss mitigation option for homeowners who have fallen behind on their mortgage payments. It involves deferring a specific amount of past-due principal, interest, taxes, and insurance (PITI) into a non-interest-bearing loan. This deferred amount is secured by a subordinate lien on the property, meaning it is secondary to the original mortgage.

The purpose of a partial claim is to help homeowners cure their mortgage delinquency. This mechanism is utilized with government-backed loans, such as those insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA). Funds for the partial claim are provided by the respective government agency (e.g., HUD for FHA loans) and advanced to the mortgage servicer to cover missed payments.

The partial claim does not require monthly payments and does not accrue interest, distinguishing it from a traditional second mortgage. It is a promissory note that becomes due and payable only upon certain events. This deferred repayment structure provides immediate relief to homeowners by eliminating the burden of a large lump-sum payment to catch up on arrears. The maximum amount covered by a partial claim is up to 30% of the mortgage’s unpaid principal balance as of the date of default.

Eligibility Requirements

To be considered for a partial claims mortgage, homeowners must meet specific criteria. A fundamental requirement is that the homeowner must be delinquent on their mortgage payments, typically 3 to 12 months behind. The property must also be the homeowner’s primary residence.

The homeowner needs to demonstrate a verifiable financial hardship that led to the delinquency. This hardship should be resolved or manageable, indicating an ability to resume regular mortgage payments. While specific debt-to-income ratios or loan-to-value requirements may apply, a key consideration is the homeowner’s capacity to maintain future mortgage obligations.

Partial claims are available for loans insured or guaranteed by federal agencies like the FHA, VA, or USDA. Homeowners must make a minimum number of monthly payments on their mortgage as prescribed by the relevant agency. In some cases, successfully completing a trial payment plan with the mortgage servicer may be a prerequisite.

The Application Process

Initiating the process for a partial claims mortgage begins with the homeowner contacting their mortgage servicer as soon as financial difficulties arise. Early communication allows the servicer to discuss available loss mitigation options and guide the homeowner through the necessary steps.

The servicer will request financial documents to assess the homeowner’s eligibility and current financial standing. This documentation includes proof of income, such as recent pay stubs, tax returns, or profit and loss statements for self-employed individuals. Homeowners need to provide proof of expenses, including utility bills and statements for other loans.

A significant component of the application package is a hardship letter, which explains the financial difficulty that led to the mortgage delinquency and outlines how that hardship has been resolved or is being managed. Bank statements are required to verify financial assets and transaction history. Homeowners will need to complete a Uniform Borrower Assistance Form (UBAF) or a similar servicer-specific application form.

Homeowners should meticulously complete all forms, ensuring accuracy and providing all requested information. The completed application package, including all supporting documentation, is submitted to the mortgage servicer for review. The servicer will evaluate the application to determine eligibility for a partial claims mortgage or other loss mitigation solutions.

Repayment and Loan Servicing

Once a partial claims mortgage is approved, a subordinate lien is placed on the property for the partial claim. This lien means that the government agency, typically HUD for FHA loans, holds a claim against the property. The partial claim is interest-free and does not require monthly payments from the homeowner. This structure allows the homeowner to focus on resuming their regular first mortgage payments without an immediate additional burden.

Repayment of the partial claim is triggered by specific events. Common triggers include the sale of the property, refinancing the first mortgage, or the maturity of the first mortgage. In these scenarios, the full amount of the partial claim must be repaid from the proceeds of the sale or refinance, or at the end of the original mortgage term. Default on the first mortgage could also trigger repayment.

The existence of a partial claim does not alter the terms of the original mortgage. Homeowners continue to make their scheduled payments on the primary loan as they did before the financial hardship. Servicing of the partial claim loan is managed either by the original mortgage servicer or by the government agency that provided the funds, such as HUD. While the partial claim offers immediate relief, it represents a debt that will eventually need to be satisfied under the specified conditions.