How does an FHA short sale work?
The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA-approved lenders. FHA is the largest mortgage insurer in the world. FHA became part of the Department of Housing and Urban Development (HUD) in 1965.
Below are the criteria for participation in the HUD Preforeclosure Sale Program (PFS):
– The home must be owner-occupied, with exceptions made for death, divorce, forced job relocation, or unemployment.
– Investment properties or strategic defaults do not qualify for the PFS Program.
– The property must be listed with a licensed real estate agent who is not related to the borrower.
– The short sale must be an arms-length transaction, whereby the buyer cannot be a relative or business associate of the seller.
– The borrower must be at least 31 days behind on their mortgage payment when they sell the property.
– The property is to be listed on the market for at least four months, with the potential to keep it on the market for an additional 12 months.
– Real estate commission cannot exceed six percent of the sale price.
– The borrower must submit documentation proving the inability to continue making payments.
– The buyer will be allowed a seller closing cost assist up to one percent. If the buyer needs more, a variance has to approved by HUD.
– HUD will allocate up to $1,500 toward secondary liens.
– HUD will not pay for:
o Title insurance
o A home warranty
o Repair reimbursements
o Discount points for non-FHA financing.
– A relocation incentive up to $1,000 will be paid to the borrower if the sale occurs within three months from the date of application. Thereafter, the incentive is reduced to $750.
– The lender must order an FHA appraisal, which will contain the “As-Is” Fair Market Value (FMV). The appraisal is valid for 120 days. The appraisal must be provided to the borrower or real estate agent upon request.
If the property is approved for the PFS Program, an Approval to Participate (ATP) is issued. The date of the form becomes the starting date of the PFS participation. The ATP is a short sale pre-approval. It will state the date by which a signed sales contract must be obtained and the minimum acceptable sale price. The ATP is valid for four months and can be automatically extended for two months. The lender has to delay the foreclosure proceeding during that period.
Once the ATP is issued, one can predict the acceptable sale price if it is below the amount stated in the ATP. HUD adheres to the following Tiered Net Sales Proceeds guidelines:
– For the first 30 days of marketing, lenders may only approve offers that will result in a minimum net sales proceeds of 88 percent of the As-Is appraised value.
– For the next 30 days of marketing, lenders may only approve offers that will result in a minimum net sales proceeds of 86 percent of the As-Is appraised value.
– For the duration of the PFS marketing period, lenders may only approve offers that will result in minimum net sales proceeds of 84 percent of the As-Is value.
Sometimes the As-Is appraisal value is well above what buyers are willing to offer. FHA has the following appraisal dispute guidelines (which are not published publicly by HUD but we learned from experience):
– FHA must be provided with three to four comparable sales that sold in the six-month period prior to the date that the appraisal was completed.
– The comparables must be full, Agent Detail Multiple Listing Service (MLS) sheets showing the sold date, sold price, and property description.
– Sales used in the original appraisal cannot be submitted as dispute comparables.
– The comparables must be submitted via email, not via fax or regular mail.
– The seller needs to be advised that the dispute decision is final.
– If the approval is granted to order a second appraisal, the As-Is FMV is final, even if it is higher or unchanged.
There is a serious flaw in the FHA appraisal dispute process. They do not take into account a declining market or a deteriorating house. FHA demands the dispute comparables be ones that sold in the six-month period prior to their appraisal. However, if the property has been on the market for multiple months, those comparables are too old and no longer indicative of the market condition. Furthermore, the house could be losing value due to deferred maintenance, and FHA does not properly account for property deterioration. Therefore, it is critical for the seller or listing agent to liaison with the appraiser ahead of time so the appraiser is made aware of the market conditions.