October 7th, 2019 6:57 AM by Jackie A. Graves, President
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:
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.
the next 30 days, the offer must be for at least 86% of the appraised value.
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:
cost of a home warranty
points on loans other than FHA-backed loans
of the lender’s title insurance fee
Eligibility requirements for the HUD PFS program include:
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.
homeowners must provide proof of their inability to pay the mortgage and their
need to vacate the home.
homeowner must be at least 30 days delinquent on mortgage payments at the time
the sale closes.
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
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
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.
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