Seven Key Changes for the Revised FHA Waterfall

FHA-insured mortgage loans are a key component of financing for low- and moderate-income homeowners.  As a result, the rights of homeowners facing financial hardship to modify their FHA-insured mortgage payments are of special significance.  FHA determines those rights by providing guidance to the entities servicing the FHA-insured mortgages.  This article summarizes the seven top recent changes to that guidance, with cites for more detail to the recently revised Chapter 8 of NCLC’s Mortgage Servicing and Loan Modifications.

Effective October 1, 2025, mortgage servicers apply a revised system for helping homeowners with FHA-insured loans who face financial hardship. The revised system replaces FHA’s version of the Home Affordable Modification Program (FHA-HAMP) and includes programs that are similar to those available through FHA’s COVID-19 system. 

Chapter 8 of NCLC’s Mortgage Servicing and Loan Modifications now includes a full discussion of the revised FHA system, which is called the “waterfall” because it describes the order in which mortgage servicers consider the available options. Here are the top seven things to know about the revised waterfall.

1. Minimized Required Documentation Streamlines Loss Mitigation

Previous versions of FHA’s waterfall required mortgage servicers to collect extensive financial documentation, causing significant delays for borrowers seeking help. FHA’s revised waterfall removes cumbersome documentation requirements. 

According to HUD Handbook 4000.1, “The Borrower is not required to provide financial documentation to be evaluated for a Loss Mitigation Option. The Mortgagee must not use any financial documentation about the Borrower to disqualify the Borrower from a Loss Mitigation Option other than the required Financial Hardship documentation.”  U.S. Dep’t of Hous. & Urban Dev., 4000.1: FHA Single Family Housing Policy Handbook, at III(A)(2)(h)(iv)(B) (Nov. 26, 2025) (“Handbook 4000.1”).

Instead, the servicer only needs the following information: (1) the reason for the financial hardship, (2) the borrower’s occupancy status, and (3) documentation that may be necessary due to the borrower’s status as a servicemember or a successor-in-interest to the property. HUD provides a chart regarding documentation that may be needed for the financial hardship. Handbook 4000.1, at III(A)(2)(h)(iv)(C). Once the servicer receives this information, it should be considered a “Complete Loss Mitigation” application under RESPA’s loss mitigation rule.

To identify the proper option for a borrower, servicers use an eight-question chart provided in Handbook 4000.1, at III(A)(2)(h)(v). Those assisting FHA-insured homeowners should review this chart in addition to other HUD guidance. This streamlined process should help borrowers avoid some of the significant roadblocks faced in the past.   For more detail, see NCLC’s Mortgage Servicing and Loan Modifications § 8.2.3.2.

2. New Home Retention Options Depending on Extent of Required Relief

Instead of assessing borrower eligibility for loss mitigation options through an analysis of financial information, mortgage servicers under the revised waterfall determine eligibility by discussing what options a borrower can afford. Once the servicer has determined—following HUD’s eight-question waterfall chart—that a repayment plan is not feasible and that a permanent option is appropriate, the servicer asks the borrower who has faced financial hardship if the pre-hardship mortgage payment is affordable. 

If the pre-hardship payment is not affordable, the servicer evaluates the borrower for payment relief options. The payment relief options target a 25% reduction in the borrower’s monthly principal and interest payment with some exceptions. There is no guarantee that the 25% payment target is achieved.

Though there are multiple options available in FHA’s waterfall, it is the servicer, not the borrower, who determines the proper option. Once the servicer determines if the borrower can afford the pre-hardship payment or payment relief is necessary, the servicer applies a HUD-created system for identifying the proper relief option for the borrower. 

This system is outlined in Appendix 4.0 to Handbook 4000.1. Appendix 4.0 follows the eight-question waterfall chart but provides specific detail regarding calculations. Those assisting FHA-insured homeowners should review both Appendix 4.0 and the additional relevant provisions of Handbook 4000.1.  For more information, see NCLC’s Mortgage Servicing and Loan Modifications §§ 8.2.3.3, 8.2.3.4.

3. Instead of Documenting Income, Borrowers Must Attest to Affordability

Once the servicer identifies the proper option, the borrower must attest that the proposed loss mitigation payment is affordable. According to Handbook 4000.1, “the Borrower affirms the monthly Mortgage Payment amount offered is affordable; and the Borrower acknowledges they will not be eligible for another Permanent Home Retention Option, which may provide additional payment reduction, in the 24 months following the execution of the offered Permanent Home Retention Option.” Handbook 4000.1, at III(A)(2)(i)(iii)(B)(2).

The affirmation may be verbal, but servicers may also require it in writing. Handbook 4000.1, at III(A)(2)(i)(iii)(B). For more information, see NCLC’s Mortgage Servicing and Loan Modifications §§ 8.2.3.3, 8.2.3.4.

4. One Permanent Loss Mitigation Option over a 24-Month Period

The revised FHA waterfall imposes a general limit of one executed home retention option every 24 months. When the COVID-19 loss mitigation waterfall applied, HUD did not impose such limitations on loss mitigation; however, the revised policy is like the one that applied prior to the pandemic. See NCLC’s Mortgage Servicing and Loan Modifications § 8.2.3.2.

Handbook 4000.1 provides a few exceptions to the 1-in-24 rule: “a Borrower who received a PDMDA [Presidentially-Declared Major Disaster Area] Home Retention Option and COVID-19 Home Retention Option in the past 24 months remains eligible for a Permanent Home Retention Option or OWL [Outside of the Waterfall Loan Modification]; and a Borrower who received a Permanent Home Retention Option, OWL, or PDMDA Home Retention Option within the past 24 months remains eligible for a PDMDA Home Retention Option if impacted by a disaster associated with a PDMDA.” Handbook 4000.1, at III(A)(2)(i)(iii)(A)(2). For more information, see NCLC’s Mortgage Servicing and Loan Modifications §§ 8.2.3.1, 8.2.3.2.

5. FHA’s Payment Supplement Program Remains in the Waterfall

HUD’s revised waterfall retains the Payment Supplement program, which is a unique program based on FHA’s Partial Claim. As discussed in NCLC’s Mortgage Servicing and Loan Modifications § 8.2.3.1, a partial claim is a noninterest-bearing mortgage loan from FHA to the borrower that becomes due and payable once the primary mortgage is paid in full or another specified event occurs. 

No monthly payments are required on the partial claim loan. The authorizing statute imposes a cap on the amount of partial claim assistance a borrower can receive—that maximum is 30% of the unpaid principal balance at the time of the borrower’s first partial claim.

Under the new Payment Supplement plan, the servicer offers a partial claim to (1) bring the borrower’s loan current and (2) reduce the borrower’s monthly payment obligation by a specified amount for a three-year period. For the three-year period, the borrower’s reduced payment is supplemented by the partial claim. At the end of the three-year Payment Supplement period, the borrower’s payment obligation returns to the contract payment. 

The Payment Supplement targets a 25% reduction in payment; however, the amount of relief a borrower will receive during the three-year period depends on how much remains available of their lifetime maximum partial claim. In fact, some borrowers who have had previous loss mitigation assistance may not be eligible for any Payment Supplement assistance because they have hit the 30% statutory cap. Handbook 4000.1 discusses how to calculate the Payment Supplement payment and how the Payment Supplement fits with the other FHA options.

The advantage of the Payment Supplement plan is that it does not require an extension of loan term or an adjustment to the borrower’s interest rate. Many FHA-insured borrowers have interest rates that are substantially lower than the market rate, and for these borrowers, a standard loan modification may result in both an increased interest rate and an increased payment. The Payment Supplement avoids this problem by allowing borrowers to keep their contract interest rate. 

One disadvantage of the Payment Supplement is that, unlike a standard loan modification, the reduced payment does not last for the life of the loan and instead is limited to the three-year Payment Supplement period. Because the Payment Supplement is the last step in the revised HUD waterfall, servicers should first evaluate whether permanent options can assist the borrower. For more information on the Payment Supplement, see NCLC’s Mortgage Servicing and Loan Modifications § 8.2.3.4.4.

6. Required Three-Month Trial Plan Prior to a Permanent Home Retention Option

After the servicer identifies an appropriate loss mitigation option, the borrower must complete at least a three-month trial plan period to receive the option and resolve the delinquency. Under Handbook 4000.1, the servicer must determine the amount of the trial plan payments using the estimated monthly payment of the approved home retention option. “[T]he monthly payment under the TPP [Trial Plan Payment] must be the projected monthly Mortgage Payment, after an escrow analysis.” Handbook 4000.1, at III(A)(2)(i)(iii)(C)(2)(c). The trial plan payments are intended to ensure that the borrower can afford the monthly payment of the loss mitigation option at issue. For more information, see NCLC’s Mortgage Servicing and Loan Modifications § 8.2.3.2.

7. Access of Successors-in-Interest to the FHA Waterfall

Finally, FHA clarifies that servicers should evaluate successors-in-interest to the original homeowner under the revised waterfall. Under the COVID-19 waterfall, successors-in-interest had to apply for FHA-HAMP instead of having access to streamlined loss mitigation options. However, this different treatment is no longer required by HUD. Successors-in-interest will have to complete a six-month trial plan, rather than the standard three-month trial plan, before receiving the permanent loss mitigation offer. Handbook 4000.1, at III(A)(2)(i)(iii)(C)(2)(b).