HUD’s Preforeclosure Sales Program Avoids Foreclosure
Housing and Urban Development (HUD) has a Preforeclosure Sales Program that will allow a homeowner in default on a HUD mortgage to prevent a foreclosure and sell a home, even if it results in a short sale. To read all the details of this program to avoid foreclosure, click here
The short summary of the program is that owners who are 31 days or more late on mortgage loan payments on certain loans related to HUD can contact HUD to start the process. They will fill out applications and get a Information/Disclosure form 90035 mailed from HUD. If the owner is approved for the program, they receive an Approval to Participate notice from HUD. The owner must then list the property with a Realtor, who is not a relative for an arms length real estate sales effort, including an MLS listing. This sales program gives the owner four months to get a contract to sell the short sale home, and the sale must close within 6 months of when the owner is accepted into the program (or 8 months with special qualification) . During that time, the home mortgage lender will stop foreclosure.
As a part of selling a home using this program, the owner will need to get an FHA approved appraisal to establish an “as-is” value. Then, the owner can place the property for sale, sell for less than the appraised value. and use the proceeds to pay as much as possible on the home loans. The amount of the allowed sales price goes down as time goes on. During the first 30 days on the market, the sales price has to be at least 88% of the appraised value. In the next 30 days, the sales price can be at least 86%, and for the rest of the program it has to be at least 84% of the appraised “as is” value. This approved sales price creates a quick form of mortgage loss mitigation, as the loss mitigation department should give a quick approval to any offer that meets these guidelines.
As a part of the sales program, the owner may receive some portion of the sales proceeds, which is extremely unusual for short sales because the seller is typically required to walk away with nothing. If the home sale is closed within 3 months, the incentive is $1,000 and it decreases to $750 after that. The program has an additional $1,500 that can be used to pay off any junior mortgage loans after the incentive payment is applied, i.e. to pay off a second trust deed loan or a home equity loan.
The program allows the seller to pay up to 1% of the sales price as a payment toward the buyer’s closing costs which is also unusual for short sales. In order to encourage good marketing, this program to prevent a foreclosure sale allows a real estate commission of up to 6% of the sales price, which is consistent with the new Fannie Mae policy on reasonable commissions in real estate short sales.
This program applies only to owner occupied homes for sale. If it is an investment property, or a property abandoned by the owner, those houses for sale do not qualify.
For homes that qualify under the Preforeclosure Sales Program with home loans associated with HUD , you can do a sale that is up to 16% below the appraised value and those proceeds will be approved to satisfy the HUD related mortgage loans. There is no restriction on how short the payment is in comparison to the mortgage balance, just a limit on how low the price can be in relation to the appraised value. So, if the mortgage balance is above the appraised value, the sale could be well over 16% “short”. In other words, you can get this short sale approved easily by the loss mitigation department if you comply with the procedural requirements established by HUD.
This program is a little know part of the Realtor training of how to short sale a home, but it decreases the number of foreclosed homes and gives the buyer a smooth home buying experience.