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Short Sales in CT > Blog > FHA: Preforeclosure Short Sale Program: Guidelines and Rules
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FHA: Preforeclosure Short Sale Program: Guidelines and Rules

August 27, 2012



PREFORECLOSURE SALES PROGRAM

The Preforeclosure Sale Program allows a Borrower in default to sell his or her home and use the
sales proceeds to satisfy the mortgage debt, even if the proceeds are less than the amount owed.
Ref: Mortgagee Letters 2003-19, 2008-43 and 2010-08.

FACTS

● Outright sale of mortgaged property to a third party and must be an “arms length”
transaction.

● Outstanding indebtedness includes; unpaid principal balance + delinquent interest +
Partial Claim (if applicable).

● HUD will pay up to $1,000 incentive to the Borrower if closed within 90 days from the
date of application; thereafter, the incentive is reduced to $750.

● HUD will pay an additional amount up to $1,500 for the discharge of junior liens after
the Borrower’s incentive has been applied.

● HUD allows all reasonable cost of the sale including up to 6% sales commission,
local/state transfer tax stamp and other customary closing cost.

● HUD allows up to 1% of the buyer’s mortgage amount for closing costs to be included in
the “Seller’s Costs” on the HUD-1 for all transactions that involve a new FHA-insured
mortgage.

● Tiered Net Sales Proceeds requirement during the 120 day marketing period, is
applicable as follows:

        o For the first 30 days of marketing, Lenders may only approve offers that will
result in minimum net sale proceeds of 88% of the “As-Is” Appraised Fair Market
Value.

        o During the second 30 days of marketing, Lenders may only approve offers that
will result in minimum net sale proceeds of 86% of the “As-Is” Appraised Fair
Market Value.

        o For the remaining 60 days of the Preforeclosure Sale marketing period, Lenders
may only approve offers that will result in minimum net sale proceeds of 84% of
the “As-Is” Appraised Fair Market Value.

● Unacceptable Settlement Costs:

        o Repair reimbursements or allowances;

        o Home Warranty Fees;

        o Discount points or loan fees for non FHA-financing; and

        o Lender’s Title Insurance fee.Revised – June 22, 2011

● Property Condition:

        o Properties that have sustained damage may be eligible for the Preforeclosure Sale
Option.

        o If the cause of the damage is fire, flood, earthquake, tornado, boiler explosion (for
condominium’s only) or Lender neglect (i.e., surchargeable damages as defined in
24 CFR Part § 203.378) Lenders must obtain prior approval from the NSC at the
address above.

        o Prior to seeking this approval, the Lender must obtain the government’s estimate of
the cost to repair the surchargeable damage by contacting HUD’s Mortgagee
Compliance Manager Contractor.

        o HUD’s Mortgagee Compliance Manager Contractor contact information can be
found on the Internet at:

        o http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/mcm

● Under no circumstance should the Borrower be encouraged to default on their mortgage
for the purpose of participating in the Preforeclosure Sale Program.


ELIGIBILITY

● The property must be owner-occupied, no “walk-a ways” or investment properties.
Exceptions: when it is verifiable that the need to vacate was related to the cause of default
(job loss, transfer, divorce, death), and the subject property was not purchased as rental
investment, or used as a rental for more than 18months.

● The Borrower must be 31 days or more delinquent at the time of the Preforeclosure Sale
closing.

● The Borrower must provide documentation substantiating a reduction in income or an
increase in living expense, and documentation that verifies the Borrowers need to vacate
the property (if applicable).


PROCEDURES
(1) Borrowers who express an interest in the Preforeclosure Sale Option or who have been
identified by the Lender as a qualified candidate for the Preforeclosure Sale Program must be
mailed a copy of the revised Information/Disclosure Form HUD-90035.

(2) The Lender must obtain a standard “As Is” FHA appraisal which has been completed in
accordance with the requirements of HUD Handbook 4150.2 (Valuation Analysis for Single Family
One-to Four-Unit Dwellings). To this end, Lenders must:

     ● Obtain a standard electronically-formatted appraisal from an appraiser on FHA’s
Appraiser Roster. The selected appraiser must not share any business interest with
the Borrower or the Borrower’s agent. Appraisals obtained by the buyer, seller, real
estate agent, or other interested parties may not be used to establish the Fair Market
Value of the property for the Preforeclosure Sale Program. It is also important to note
that:Revised – June 22, 2011

             ○ The appraisal must contain an “As-Is” Fair Market Value for the subject property;

             ○ Effective April 1, 2010, the appraisal will be valid for 120 days from the effective
date of the appraisal; and

             ○ Distress sales may not be used by the appraiser to establish comparable values
unless they represent the only comparables within reasonable proximity of the
subject property.

     ● Provide a copy of the appraisal to the homeowner, sales agent, or HUD, upon request.

     ● Lenders are reminded that in accordance with HUD regulations at 24 CFR Part §
203.365 (c) they are responsible for the accuracy of all documentation used in the
Preforeclosure Sale decision, including accurate and complete appraisal information.


In an effort to ensure that the most current Fair Market Value is used for the Preforeclosure Sale,
a Lender may obtain a new FHA appraisal, even if the property was appraised by an FHA Roster
Appraiser within the preceding 120 days.

To be reimbursed through HUD’s claim filing process, the cost of the appraisal must be
reasonable and customary for the market area where the appraisal is performed. The appraisal
must be retained in the claim/servicing file, even if the Preforeclosure Sale is not approved or
completed.

(3) The Lender must obtain a title search or preliminary report verifying that the title is not
impaired with un-resolvable title problems or with junior liens that cannot be discharged as
permitted by HUD.

(4) When an application is accepted an Approval to Participate form is used. The date of this
form becomes the starting date of the Preforeclosure Sale participation. The Approval to
Participate form must include the date by which a signed contract for sale must be obtained and
minimum acceptable net sales price.

     ● The Borrower agrees to show good faith in attempting to market and sell the property.

     ● The Borrower must perform all normal property maintenance and repairs until closing of
the Preforeclosure Sale.

     ● The Borrower must list the property with a licensed real estate broker, unrelated to the
Borrower. The listing agreement must include a specific cancellation clause in the event
the terms of the sale are not acceptable to HUD.

(5) The Lender delays foreclosure to allow pursuit of the Preforeclosure Sale.

(6) The Preforeclosure Sale period shall be four months beginning upon Lender approval
(automatically extended two months for Lenders in Tier 1; or there is a signed Contract of Sale,
but settlement can not occurred by the end of the fourth month).Revised – June 22, 2011

(7) The Lender should review marketing efforts with the Borrower and/or the Real Estate
Broker/Agent on a monthly basis.

(8) The sale closing must occur within six months, if Lender is in Tier 1, from the date the
Lender notified the Borrower in writing of approval to participate in the Preforeclosure Sale
Program.

If you have any question you may contact NSC at:

National Servicing Center

NSC’s Call Center - 1-877-622-8525

Frequently Asked Questions:

Preforeclosure Sale Forms:


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