I like to follow my web traffic and see what they are coming to my blog to learn more about.  It seems a very frequent search I get is people (and even banks!!!)  looking for the HUD rules for the FHA Preforeclosure Sale program.  Because of this I wanted to address the FHA Preforeclosure guidelines here again and give a little more information.

Click here to download the Mortgagee Letter 08-43-- FHA  Preforeclosure Sale Program guidelines these short sale guidelines can also be found directly on the HUD website Loss Mitigation Policy & Guidance page along with other useful information about selling your home short when it has an FHA loan.

A couple of the important things to take note of:

  1. You need to get the process started at the time, or before, the time you list the property with a real estate agent who is a short sale specialist.  You really should hire someone who is familiar with the FHA Preforeclosure Program process.
  2. This new process gets you an approved price at the beginning so you know what the lender will accept.  This, hopefully, will allow you to get a contract on your home for what you know the lender will accept and will make it easier to get a contract since the buyer will not have the usual uncertainty of a short sale.  The net required proceeds actually went UP with the issuance of these new guidelines.  It used to be 82%.  Now it starts at 88% with the floor being at 84%.
  3. On the downside. if the lienholder's appraisal comes in unrealistically high, it can become very hard to find a buyer since the bank is dealing with a less than accurate value.  Since the appraisal is good for six months, according to the guidelines, this can be devastating.  Trying to convince the bank to reappraise can be very hard.
  4. Keep in mind...the marketing periods outlined below concerning the net proceeds required...begin from the time you get your approval to participate from the lender...not from the time you apply or put your home on the market.
  5. The rules of allowable closing cost amounts and details are not the same for a FHA short sale seller and a buyer who may be purchasing with an FHA loan. 

Below is an excerpt from the Preforeclosure Sale letter that addresses the biggest questions sellers, and short sale agents seem to have.  It deals with the net sale proceeds percentages, allowable closing costs, closing costs not allowed and the time frame:

Net Sale Proceeds – Regardless of the property’s sale price, a mortgagee may not approve a PFS contract if the net sale proceeds fall below the minimum allowable thresholds stated herein.  HUD has established guidelines for varying minimum net sales proceeds based on the length of time a property has been competitively marketed for sale.
  • For the first 30 days of marketing, mortgagees may only approve offers that will result in minimum net sale proceeds of 88% of the “as-is” appraised FMV.
  • During the next 30 days of marketing, mortgagees may only approve offers that will result in minimum net sale proceeds of 86% of the “as-is” appraised FMV.
  • For the duration of the PFS marketing period, mortgagees may only approve offers that will result in minimum net sale proceeds of 84% of the “as-is” appraised FMV.
Mortgagees have the discretion to deny or delay sales where an offer may meet or exceed the 84%, if it is presumed that continued marketing would likely produce a higher sale amount.  However, the mortgagee is still limited to 4 to 6 months after the date of the mortgagor’s approval to participate in the PFS Program. Allowable Settlement Costs – The term “Net Sale Proceeds” is defined as the sales price minus closing/settlement costs (i.e., reasonable and customary costs per jurisdiction that are deducted at settlement).  Allowable settlement costs include:
  • Sales commission consistent with the prevailing rate but, not to exceed 6%;
  • Real estate taxes prorated to the date of closing;
  • Local/state transfer tax stamps and other closing costs customarily paid by the seller including the seller’s costs for a title search and owner’s title insurance;
  • Consideration payable to seller of $750 or $1,000 (i.e., if such consideration is not used to discharge junior liens);
  • Up to $2,500 to be used for the discharge of junior liens if closing occurs within 90 days.  Within 90 days, the first $1,000 represents the mortgagor’s consideration and the additional $1,500 represents FHA’s consideration for a total of $2,500.  If settlement occurs after 90 days, the first $750 represents the mortgagor’s consideration and the additional $1,500 represents FHA’s consideration for a total of $2,250;
  • Outstanding partial claim amount. This entire amount must be paid when calculating the net sales proceeds.  The seller, buyer, or other interested party may contribute the difference if the net sales proceeds’ amount falls below the allowable threshold; and
  • Up to 1% of the buyer’s first mortgage amount if the sale includes FHA financing.
Unacceptable Settlement Costs – The following costs may not be included in the net sales proceeds calculation, however, the seller may use their consideration of $750 or $1,000 for these settlement costs.
  • Repair reimbursements or allowances;
  • Home Warranty fees;
  • Discount points or loan fees for non FHA-financing; and
  • Lender’s Title Insurance fee.
Duration of the Pre-Foreclosure Sale Period Unless an extension has been approved by NSC, mortgagees have 4 months from the date of the mortgagor’s approval to participate in the PFS Program. Mortgagees have a pre-approved extension of 2 additional months to complete the PFS if one of the following exists: The mortgagee is in the Tier 1 category under the Department’s Tier Ranking System (TRS); or
There is a signed Contract of Sale, but settlement has not occurred by the end of the fourth month following the date of the mortgagor’s approval to participate in the PFS Program. Mortgagees are reminded that, on a monthly basis, they must review a property’s marketing status with the mortgagor and/or real estate broker.

The guidelines also only give a lender five business days after receipt of a sales contract on a property that has been accepted into the FHA Preforeclosure Sale program to respond to the executed contract.  (Note: This confirms that they do not want "offers" but contracts.) While this is the new criteria, so far I have not seen a lender keep to the five day time frame.  Hopefully this will improve as they become accustomed to the new process.