FHA short sales are the easiest to process. The reason FHA short sales are so easy is because there is a systematized process defined by HUD (Department of Housing and Urban Development) that absolutely has to be followed when doing the short sale. The lenders don’t have free reign to do anything outside of what is already defined by HUD. Here are a few things you need to know that give you and edge regarding FHA short sales.
First, FHA requires at least one of the owners to be occupying the home at the time of short sale. This requirement can be waived due to severe hardship that causes the seller to vacate. In addition, the seller MUST be at least 31 days delinquent on the loan.
The seller MUST be approved into the pre-foreclosure program before the lender can consider any offers. This approval is evidenced when the Seller receives HUD form 90045 from the loss mitigation department at the lending institution. This form is titled “Acceptance into the Pre-Foreclosure Sale Program.” This form will reveal the property’s appraised value!
The minimum NET PROCEEDS (not purchase price) to the FHA 1st mortgage is based on “As-Is” Appraised Value AND Length of Time from Date of Approval:
Less than 30 days = 88% 30-60 days = 86% 61+ days = 84%.
So, the net proceeds that the lender needs to receive at closing MUST be no less than the percentages listed above of the appraised value, which is referenced on HUD form 90045. This means that you MUST ensure that everything in the transaction that will be paid (i.e. Realtor commissions, closing costs, liens, judgments, seller incentives, prorated taxed, etc.) has to be accounted for before reaching the 84-88% threshold. The lenders will not take a penny less!
Once accepted into the pre-foreclosure sale program, HUD gives the seller 90 days to sell their home under the terms of the agreement. The lender is required to postpone all foreclosure proceedings 90 days past the date of approval in the meantime.
FHA will provide a seller incentive of no more than $1,000 to the seller if they come under contract and close within the 90-day period. That’s right, a gift to the seller for not going to foreclosure! This is reduced to $750 if the property comes under contract in the 90-day period, but doesn’t close until after that period – EXTREMELY IMPORTANT!
FHA will allow up to $2500 as a payoff to a 2nd mortgage or other junior liens affecting the property. However, the seller will then be required to forfeit the $1000 incentive to the 2nd lender/junior liens. The incentive is applied first before applying the additional $1,500.
There are some closing costs that the lender will not pay on behalf of the seller at closing. The will not pay for a home warranty, HOA delinquent dues, HOA transfer fees or the water/sewer escrow. The incentive noted above could be used for these costs.
HUD ABSOLUTELY WILL NOT allow any seller paid buyer closing costs if the buyer is receiving conventional financing. If the Buyer is obtaining FHA financing, then FHA will allow a MAX of 1% seller paid buyer closing costs. The buyer cannot “bid up” the purchase price to cover seller concessions on an FHA short sale. HUD simply will NOT allow it. The incentive noted above CAN be used for seller concessions. So, any buyer that needs seller concessions over $1,000 will not be able to purchase your home via the short sale.
As you can see, an FHA short sale requires a different strategy than working with a VA or conventional short sale. Most Realtors do not even know about this FHA incentive and the way they work. We at the Home Source Group constantly strive to keep up to date on all the changes in how each bank and investor works so we can help every seller.