Housing Counselor Certification (HUD) Practice Exam

Which retention option is most likely to offer a principal reduction?

1. Short Sale

2. Loan Modification

3. Forbearance

4. FHA Partial Claim

The correct answer is: Loan Modification

The most likely retention option to offer a principal reduction is a loan modification. In the context of mortgage assistance, a loan modification may involve the lender agreeing to change the terms of the loan to make it more affordable for the borrower. This can include lowering the interest rate, extending the loan term, or reducing the principal balance. When a borrower is facing financial difficulties, a loan modification can serve as a means for them to remain in their home while also making the mortgage more sustainable in the long term. The option of principal reduction is often included as part of a loan modification when the lender assesses that it is in their best interest to keep the borrower from defaulting, which can be costlier than restructuring the loan. Other options, such as short sales, forbearance, and FHA partial claims, focus on alternative routes rather than directly reducing the principal balance. A short sale involves selling the home for less than the amount owed on the mortgage, effectively terminating the loan but not reducing the principal on the existing loan. Forbearance allows the borrower to temporarily pause or reduce payments but does not alter the principal amount owed. FHA partial claims provide additional loans from the FHA to help catch up on mortgage payments but do not directly reduce the principal on the existing