I Have an FHA Partial Claim. What Happens to It When I Sell My House or Do a Short Sale?

An FHA partial claim is an interest-free second mortgage you signed in favor of HUD, and it comes due when you sell the house. In a regular sale it is paid off at closing from your proceeds. In an FHA short sale (HUD calls it a pre-foreclosure sale), HUD’s rules require the partial claim to be paid in full out of the sale proceeds before the servicer decides whether the offer is acceptable. You do not walk away owing it, but it makes approval harder.

Many Florida homeowners who caught up on an FHA loan signed partial claim papers without realizing they had created a second lien.

What an FHA partial claim is

A partial claim is money HUD advanced to bring your FHA loan current, secured by a subordinate mortgage that you signed in HUD’s favor. The federal regulation, 24 CFR 203.371, says the borrower “must execute a mortgage in favor of HUD with terms and conditions acceptable to HUD” for the amount of the claim. The amount is the arrearage, capped at the equivalent of 12 monthly mortgage payments, plus certain default-related costs HUD prescribes (24 CFR 203.414(a)).

HUD’s current servicing rules, in Mortgagee Letter 2025-12 (effective October 1, 2025), fill in the terms:

• It must be secured by a zero-interest subordinate promissory note and mortgage in favor of HUD, and no interest will accrue on it.
• The note is made out in the name of the Secretary of Housing and Urban Development, and the subordinate mortgage, carrying your FHA case number, must be recorded.
• The total of all partial claims on the loan cannot exceed 30 percent of the unpaid principal balance as of the date of default when the first partial claim was paid.
• You may prepay part or all of it at any time.

There is no monthly payment on it, which is why it is easy to forget.

When it comes due

HUD does not require payment on the partial claim until the first of five events: the FHA mortgage matures, the property is sold or transferred, the mortgage is assumed, the mortgage is paid off, or, if the note provides for it, FHA insurance ends (Mortgagee Letter 2025-12). One exception: HUD will agree to subordinate it to an FHA Streamline Refinance.

So selling triggers repayment, and refinancing out of FHA into a conventional loan pays it off at that closing too.

How it is paid in a regular sale

If you sell for enough to pay off every lien, the partial claim is paid from your proceeds at closing, like any other mortgage. The title search picks up the recorded HUD subordinate mortgage, and the closing agent orders a payoff; HUD’s rules name its Loan Servicing Contractor as the contact for a partial claim payoff quote. With no interest, the balance is usually what HUD advanced, less anything you have repaid.

When you estimate your net, subtract the partial claim along with the first mortgage, closing costs, and other liens. If the total is more than a buyer will pay, a regular sale needs cash from you, and the question becomes a short sale. Can I sell my house if I am behind on payments covers that decision.

How it is treated in an FHA short sale

In a pre-foreclosure sale, the servicer must make sure all outstanding partial claims are paid in full, deduct them from the net sale proceeds, and send those funds directly to HUD’s Loan Servicing Contractor (Mortgagee Letter 2025-12). The pre-foreclosure sale itself is authorized by 24 CFR 203.370, which lets HUD pay insurance benefits when a defaulted owner-occupant sells at current fair market value for less than the amount owed.

Unlike a private second mortgage, HUD’s lien is not negotiated down. It comes off the top. HUD defines net sale proceeds as the sale price minus reasonable closing costs and any partial claim balance, and a servicer may only approve a contract that meets HUD’s tiered minimum: 88 percent of the as-is fair market value in days 1-30 of marketing, 86 percent in days 31-60, and 84 percent in days 61-120.

A large partial claim can push an otherwise acceptable offer below the threshold. The seller, buyer, or another interested party may contribute the difference, or the servicer must request and obtain HUD’s approval before closing. Neither is automatic, so the partial claim belongs on the table on day one. A second mortgage held by a private lender works differently; see behind on a second mortgage or HELOC. The wider FHA menu is on FHA loss mitigation options.

How to find out if you have one

Search your county’s Official Records for a mortgage in favor of the Secretary of Housing and Urban Development recorded after your original FHA loan. In Florida, the Clerk of the Circuit Court records instruments in a series called Official Records and keeps an alphabetical index by party name (Fla. Stat. 28.222).

Your loss mitigation papers would include a promissory note and subordinate mortgage showing your FHA case number. If you cannot find them, ask your servicer in writing whether a partial claim was ever paid on your loan, and for how much. HUD may require the servicer to service the subordinate mortgage for it (24 CFR 203.371(c)), so the servicer is the right first call.

What to do next

1. Confirm whether a partial claim exists, get the balance in writing, and put it in your numbers before you list.
2. If a short sale is likely, run the file checker for the FHA document list, and read FHA, VA, Fannie Mae and Freddie Mac short sales for how the investor’s rules shape the file.
3. Ask about owner-occupant compensation, which HUD lets you apply to junior liens; see short sale relocation assistance.

To talk it through, call 855-725-3898.

This page is general information for Florida homeowners and is not legal or tax advice.