A seller can qualify for a Federal Housing Administration (FHA) short sale if the Department of Housing and Urban Development (HUD) determines the seller has a hardship. All FHA short sales are governed by HUD guidelines.
A short sale is the sale of a property where the net revenues gained from selling the house do not cover the debts against the property. Because the government controls short sales, the process is time-consuming and can be confusing to short sale agents and sellers alike.
Basic Guidelines for an FHA Short Sale
There are some guidelines and criteria for short sales. These are some of the criteria the FHA uses to determine eligibility for a short sale:
- The home is identified as one to four units: This means a duplex or fourplex can qualify for an FHA short sale but a five-unit building cannot. Of note is the fact that in a duplex or fourplex, you are able to rent out units as long as you live in one of them. You must reside in an FHA loaner for a minimum of one year.
- If a home was used as a rental previous (for no more than 18 months) to the short sale, a variance must be obtained to proceed.
- The home cannot be purchased to be used as an investment: If the home is going to be a rental, the property does not qualify for an FHA short sale.
- The seller is facing a hardship: Sellers who plan to walk away from the home or hope to do a strategic short sale do not qualify.
- The seller must be at least 30 days delinquent: HUD is very careful to say a seller should not be encouraged to stop paying on a mortgage. However, if the seller is not in arrears, the FHA short sale will not be approved.
If your short sale approval appears to be going nowhere, it's possible it is stuck in FHA exploration. FHA would rather first explore the possibilities of a loan modification before approving a short sale.
The FHA has set precedence for more quickly addressing applications for short sales that have been denied. If your loan modification was initially rejected, you should submit it again. Your application will move much faster through the FHA short sale process.
Time Frame for an FHA Short Sale
The entire process usually lasts 4 to 6 months, but it can take longer. HUD can issue an extension for another 2 months. First, if the servicer is Bank of America, HUD issues an Approval to Participate—after a process to determine whether the seller and property qualify for the FHA Short Sale.
The seller is then given 4 months to sell the home. Other banks may approve the FHA short sale based on the purchase contract.
Determining Market Value
HUD will conduct a full appraisal and expect market value. The administration will not allow the sales prices of foreclosures and other short sales to be included in the appraisal unless those prices are the only comparable sales.
By eliminating nearby competing sales, the final approved sales price can sometimes be unreasonable or unrealistic.
Submitting a Purchase Offer an FHA Short Sale
Although it is better to be approved for the "pre-foreclosure sale" first, it's not necessary. You can have a purchase offer ready to submit. It's easier for the buyer, however, if a seller can get pre-approved before marketing the home because it shortens the waiting time for the buyer.
Providing compensation is not used to contribute money to the second loan, the seller can receive cash. The incentive amount starts out at $1,000. If the sale is not closed within 90 days, it drops to $750.
If the second lender requires more than $1,500 to settle the short sale, the seller will be required to contribute part or all of the incentive to the second lender.
Seller Credit Toward the Buyer's Closing Costs
It is true that many FHA buyers need a closing cost credit to help pay closing costs, and FHA will allow a 3% credit when FHA is insuring the buyer's financing.
FHA will not allow more than a 1% credit to buyers from sellers in an FHA Short Sale. It is possible to obtain a variance, however. FHA expects to net 88% of its approved sales price. If the net proceeds exceed the FHA minimum, it is possible that FHA might approve a higher seller contribution to the buyer's closing costs.
Then, the borrower should follow with an application to get pre-approved for an FHA short sale. Once accepted for the FHA Pre-foreclosure Program, the borrower should hire a short sale agent and go on the market at a pre-approved price.