Distressed homeowners who have exhausted most other methods to avoid foreclosure on their homes typically decide to perform a short sale.
The sale’s proceeds, even though less than what is owed on the mortgage, completely satisfy the debt.
If you have an FHA-backed loan, you’ll be happy to learn that the United States Department of Housing and Urban Development (HUD) offers a program, known as the Pre-Foreclosure Sales Program, which 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:
- During the first 30 days on the market, the homeowner can only accept offers to purchase that result in at least 88 percent of the appraised value of the home.
- During the next 30 days, the offer must be for at least 86 percent of the appraised value.
- For the remaining time the home is on the market, the seller can only accept offers that are for a minimum of 84 percent of the home’s appraised value.
The seller may not make the following concessions to the buyer:
- Repair allowances
- The cost of a home warranty
- Discount points on loans other than FHA-backed loans
- Payment of the lender’s title insurance fee
Eligibility requirements for the HUD Pre-Foreclosure Home Sale program include:
- The 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.
- The homeowners must provide proof of their inability to pay the mortgage and their need to vacate the home.
- The homeowner must be at least 31 days delinquent on mortgage payments at the time the sale closes.
Advantages of the HUD Short Sale Program
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 lining in the situation.
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 pays the seller a $1,000 incentive. If the home takes longer to sell, the incentive is reduced to $750.
HUD allows for a real estate commission, up to 6 percent, so you won’t have to proceed without agent representation. It also allows various customary closing costs.
If the buyer is using a FHA-backed mortgage, HUD allows the seller to pay 1 percent 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.