Partial claim is an option for avoiding foreclosure when the difficulty you are having making your mortgage payments is a long-term situation that will permanently keep you from paying off your home loan while the past-due amount is outstanding. If your situation is temporary, discuss other possibilities with your lender first, such as reinstatement, forbearance, or a repayment plan.
A partial claim is a one-time, interest-free loan from HUD (Department of Housing and Urban Development) through your mortgage lender. It will advance you the funds necessary to allow you to make the payments that will bring your mortgage current and reinstate your loan. It pays the past-due amount of principal, interest, insurance, and taxes. Payment of the loan becomes due when you sell or pay off your property.
HUD instituted the partial claim loan option to keep properties out of foreclosure and to keep defaulting borrowers in their homes.
Eligibility for Partial Claim
Not everyone will qualify for this foreclosure-avoidance option. Basic requirements for eligibility are that the property for which you are requesting assistance is your primary residence, and that your loan be between four months and one year delinquent.
If you are more than twelve months behind on your payments, you may still be eligible for a partial claim if you have sufficient resources to pay toward the delinquent amount to bring it to the equivalent of twelve months of arrearage.
Other foreclosure-avoidance options, such as forbearance and loan modification, may need to be ruled out as possibilities before your lender will help you to pursue a partial claim.
You must also be financially able to resume making your full mortgage payments after you have received the partial claim. In effect, this requires that the financial hardship that brought you into your current mortgage delinquency must be verifiably over.
The Process of Partial Claims
The first step in applying for a partial claim is to speak with your lender, and possibly HUD contacts. Your lender should send you a list of all the documentation they will need from you as you go through the partial claim process.
You will need to prepare a letter that states the reasons you have fallen behind on your mortgage payments. This is often called a "letter or explanation" and it will be used by HUD. Your letter should include both an explanation of your hardships and details on the steps you have taken to attempt to overcome your financial difficulties.
To prove to HUD that you will be able to make your full mortgage payments once you have received the partial claim, you will need to provide proof of your current income. Your lender will assess your financial status to determine whether you will have enough income to support mortgage payments over at least the next three months. You must also submit copies of your tax returns for the past two years. Your lender will most likely require your bank records for up to the past six months.
To get a partial claim, you will agree to a promissory note. The note does not collect interest and becomes due either when you pay off your first mortgage or when you no longer own the property.
Why Your Lender May Agree to Partial Claim
If you are facing foreclosure, you may not see your mortgage lender as being on your side. It is true that lenders are in business to make money, but it is also true that foreclosures are expensive for mortgage lenders. Therefore, they are often motivated to help you avoid foreclosure, as it is also in their best financial interest. In general, a lender would much rather work out an agreement that helps you to make your mortgage payments than go through the process of foreclosing upon your home.
Additionally, the FHA (Federal Housing Administration) and HUD, as well as many private mortgage insurance companies, require lenders to work aggressively to help defaulting borrowers avoid foreclosure. The FHA imposes financial penalties on lenders that do not comply with its rules about assisting borrowers. In other words, the government mandates that your mortgage lender give you opportunities to arrange accommodations that will allow you to stay in your home.
Other Advantages to Partial Claims
Your lender cannot collect additional fees from you to cover their administrative costs of preparing the partial claim. If, however, your partial claim cancels a foreclosure action, your lender is entitled to collect the legal costs for the cancelled foreclosure from you.
A partial claim may also be combined with other foreclosure-avoidance options to produce an agreement that meets your financial needs. It may form part of a forbearance agreement with your lender, but it may not be a part of a loan modification arrangement.