The changes to the HUD rules for FHA mortgage short sales supersede the prior rules of the Pre-Foreclosure Sale Program.

The ratio of sales price to fair market value has gone up!  Previously the sales price had to net 82% (after closing costs) of fair market value of the home.  Now the ratios have gone up to 88%, 86% and 84% of fair market value.  (This is okay if the appraisal is realistic, but since many come in high, the extra 2% was helpful)  The ratio used depends on the amount of time the home has been on the market.  Here is the way the tiered system works:

  • For the first 30 days of marketing the property, the lender may only approve offers that will result in minimum net sales proceeds of 88% of the as-is appraised fair market value as determined by a FHA approved appraiser.

  • During the next 30 days of marketing, the lender may only approve offers that will result in minimum net sales proceeds of 86% of the as-is appraised fair market value.

  • For the remainder of the Pre-Foreclosure Sale marketing period, the lender may only approve offers that will result in minimum net sales proceeds of 84%.

  • Even if the ratios are met, HUD is giving the lender the discretion to deny or delay a sale that meets the minimum 84% ratio if they feel that continued marketing will produce a higher net sales price.

They have defined what allowable closing costs are that go against the proceeds to arrive at a net proceed amount.  

Closing costs items specifically NOT allowed to be charged to the seller's side are:

  • Repair Reimbursements or Allowances
  • Home Warranty Fees
  • Lender's Title Insurance Fee 

  • Discount points or loan fees for non-FHA financing  (They WILL now allow up to 1% of the buyer's loan amount in closing costs to the seller's side ONLY IF the buyer is buying the home with a new FHA-insured mortgage)

For agents that are familiar with FHA short sales, they have eliminated the 63% for fair market value to outstanding mortgage balance (including unpaid principal and accrued interest).  With the declining market, this change is a very favorable change because previously this 63% requirement could create problems.

The new guidelines specifically state that if the Pre-Foreclosure sale is unsuccessful, after a homeowner participates in good faith, and the home ultimately forecloses, neither HUD nor the lender will be pursued for deficiency judgments.  It also states that a pre-foreclosure sale has to be reported to the national credit bureaus as a "Short Sale."

There are many other guidelines that are outlined in this 18 page lender letter, but these are the important changes that relate to how a short sale offer must be written by the buyer's agent (or negotiated to this point by the knowledgeable seller's agent) to qualify.  It is pointless to submit an offer on a short sale property when it is a FHA loan if the offer does not meet this basic criteria.  Another reason to make sure your agent completely understands the short sale process.  Whether you are buying or selling a short sale property, you should make sure your agent is a trained specialist and thoroughly understands the process to save yourself months of frustration and the increased likelihood that the short sale will be unsuccessful.