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Distressed homeowners who have exhausted most other methods to avoid foreclosure on their homes often decide to perform a short sale. In this transaction, the lender agrees to accept the sale’s proceeds as payment for the debt, even though the home is sold for less than the homeowner owes on the mortgage.
Homeowners who have an FHA-backed loan may be able to take advantage of a short sale program offered by the United States Department of Housing and Urban Development (HUD). Known as the Pre-Foreclosure Sales (PFS) program, it allows the seller in default to satisfy his or her mortgage debt despite the fact that the home is worth less than what is owed.
The sale must be what is known as “arm’s length,” meaning that the parties to the sale, including the real estate agent, must have no relationship to each other. Furthermore, HUD has a tiered net proceeds requirement that states:
- During the first 30 days on the market, the homeowner can only accept offers to purchase that result in at least 88% of the appraised value of the home.
- During the next 30 days, the offer must be for at least 86% of the appraised value.
- For the remaining 60 days the home is on the market, the seller can only accept offers that are for a minimum of 84% of the home’s appraised value.
The seller may not make the following concessions to the buyer:
- Repair allowances
- The cost of a home warranty
- Discount points on loans other than FHA-backed loans
- Payment of the lender’s title insurance fee
Eligibility requirements for the HUD PFS program include:
- The home must be owner-occupied. Exceptions to this requirement include homeowners who were forced to move due to involuntary job transfer, death of the homeowner, job loss and divorce, provided the home was not rented out for more than 18 months.
- The homeowners must provide proof of their inability to pay the mortgage and their need to vacate the home.
- The homeowner must be at least 30 days delinquent on mortgage payments at the time the sale closes.
Advantages of the HUD Short Sale Program
While a homeowner underwater on a mortgage has little to be optimistic about, the HUD Pre-Foreclosure Sales program offers a glimmer of a silver lining.
The sale’s proceeds, even though less than what is owed on the mortgage, completely satisfy the debt. This should provide some peace of mind to homeowners in states that allow deficiency judgments, as they are assured that they won’t be liable for the deficiency amount in the future.
If the short sale closes within 90 days of the date of application, HUD may pay the seller up to a $3,000 incentive. If the home takes longer to sell, the incentive may be reduced.
HUD allows for a real estate commission, up to 6%, so you won’t have to proceed without agent representation. It also allows various customary closing costs.
If the buyer is using a FHA-backed mortgage, HUD allows the seller to pay 1% of the buyer’s closing costs out of the proceeds.
If you feel that you qualify for the HUD Pre-Foreclosure Sales program, get in touch with a HUD-approved foreclosure avoidance counselor via HUD’s website.