Selling your home in an FHA short sale - what you need to know.

Nearly half of our short sale inventory are loans backed by HUD or FHA. Borrowers use an FHA loan to finance their purchase because it is one of the few remaining programs where you can finance over 95% of the purchase price. When the economy went into the tank, shed jobs like crazy and real estate values plummeted, it caused many homeowners with FHA loans financial hardship. Millions of borrowers were left with no way to pay their mortgage on their FHA loan, and there was no way for them to sell the property outright because the little equity they had evaporated when values collapsed. This is where the HUD Pre-foreclosure sales program comes in, or PFSP.

The HUD PFS loss mitigation option allows a borrower in default to sell his or her home and use the sale proceeds in satisfaction of the mortgage debt when the proceeds from the sale are less than the amount owed. This is the only short sale program I know of, where it is written in the guidelines that the deficiency will be waived, even if the borrower gets foreclosed on. Mortgagee letter 2008-43 states: If a foreclosure occurs after the mortgagor unsuccessfully participated in the PFS process in good faith, neither the mortgagee nor HUD will pursue the mortgagor for a deficiency judgment.

Here is what we will need to get you into the HUD / FHA preforeclosure sales program, and how the process will work. This is one of the only programs out there for short sales where you can get preapproved for a short sale.

Documentation:

• Hardship letter
• Financial statement with proof for any expenses deemed excessive
• last 2 months of bank statements
• last 2 months of pay documentation ( unemployment or payroll ) or a 6 month profit and loss if self employed.
• Last 2 years of signed federal income tax returns
• IRS form 4506-T
• 3rd party authorization allowing me to speak to your lender on your behalf
• Listing agreement with HUD cancellation clause in listing contract.

Once we get all of these documents into your lender and they determine that you are eligible for the PFSP, the lender will order a title search to determine that the property will be able to be conveyed with clean title under HUD guidelines, and an appraisal to determine that you have negative equity in the property. It is important to note that if they determine that you are financially capable of paying your mortgage, you will be declined for the HUD PFSP. You can't do a short sale on your FHA insured loan if you do not have a hardship.

When the lender receives the title work and appraisal and everything checks out, the lender will issue FORM HUD-90045, also known as the Approval to Participate. Once the homeowner signs this form, all that is left to do is find a buyer!

HUD has a tiered net proceeds system which allows us to easily determine what an acceptable offer will be on the property. In the first 30 days, the net to the lender must be no less than 88% of the appraised value. On day 31-60 the net proceeds minimum drops to 86%. After day 60, the minimum net proceeds drop to 84% of appraised value.

Let's say your property appraised at $100,000. 21 days after receiving the Approval to Participate, we receive 2 offers. During this time ( the first 30 days ) we need to net out $88,000 to the lender.

Offer 1: $98,000 financed with full inspections Offer 2: $95,000 cash with no inspections

Closing costs-

Commission - $5,880

Settlement fees - $1,500

Conveyance taxes - $980

Net to lender - $89,640 for Offer 1 $86,640 for Offer 2

Offer 1 is an acceptable offer because it meets the minimum net requirements of 88% of appraised value in the first 30 days. Offer 2 is an unacceptable offer at this point, will get declined, and there is no point in even considering that offer. UNLESS, we were past day 30 in the marketing period. After day 30, offer 2 would meet the minimum net requirements and be much more attractive as a seller, because the buyer does not have to obtain financing and has elected to not do inspections. There is a much smaller liklihood that issues will arise with Offer 2 because there are less contingincies in the contract. With offer 1, problems with buyer financing or inspections could derail the deal.

What happens next? We submit the offer paperwork and an estimated HUD1 to the lender detailing all the settlement costs. The lender will then issue a form HUD 90051, Sales contract review. This will state if the offer is approved or rejected.

If the offer is approved, we will move forward towards closing. Once the attorneys firm up the closing date and provide us with a settlement statement with the final numbers for the deal, we will submit that to the lender. Provided all costs are in order and allowable, the lender will then issue their final approval along with form HUD 90052, Closing worksheet.

At this point, all that's left to do is pray that nothing comes up in the final hours prior to closing. Once all of the documents are returned to the lender, and they confirm they are all correct and they recieve the amount of money reflected on the closing worksheet, you are now free and clear from your FHA loan.

Patrick