HUD’s Preforeclosure Sales Program Avoids Foreclosure

HUDHousing 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.

Don’t Let the Buyer Misunderstand a Short Sale

March 15, 2009 by  
Filed under Short Sale Do's & Don'ts

misunderstood-70Many Realtors have never done a short sale. If they represent buyers, they do not know what to tell them to explain the short sale home buying experience. If you are listing a short sale, be an information resource for the buyer’s agent. Or, send them here as this site provides complete Realtor education on short sales.

The first point to explain about a short sale is that you do not know how long it will take the lender to review the sale. You may have some experience with the same lender, but that does not mean they will be as efficient this time as they were last time. Estimate 45 to 60 days for the review if you do not have any experience with that lender. If the buyers are relocating for a new job that starts in two weeks, they will need to have other living arrangements. So, you need to have a longer than normal time in the contract for the closing date for a short sale home. Take your estimate of how long it will take the lender to review the sale, then add 30 days for the buyer to close the sale.

The agent for the seller needs to stay in touch with the agent for the buyer during the short sale process. You need to have some reports of progress, and tell the agent for the buyer what is being done to move the transaction along. Remember, the buyers do not know whether they bought a house or not, so they are on edge as this is not the typical home buying experience. Let them watch the progress so they can feel that something is being done.

The second point is that negotiating on a short sale is different. The sellers might sign anything at any price, because they want to get rid of the house, out of trouble and possibly avoid foreclosure. This is particularly true if he seller pays no income tax on the amount the payment to the lender is short. You do not have a deal that can close until the lender approves it. Just because the seller agreed does not mean that you can count on that price for as the final sale price of the short sale home. Most of the negotiating is with the lender.

The third point is a short sale is not a sure thing. The lender may not approve the short sale, or if the seller cannot pay the mortgage, the lender may foreclose. The buyer can make it a sure thing by paying enough to fully pay off all the liens, but I have never had a buyer who wanted to do that.

The fourth point is that the house stays on the market in a short sale. Paragraph 6 of the Nort Carolina Short Sale Addendum says that other “offers may be received by the Seller’s agent, which must be presented to the Seller pursuant to North Carolina law. Such offers may be accepted by the Seller as backup contracts and forwarded to Lienholders for review and approval.” The buyer needs to know that the house is still for sale until the contingency for lender approval is eliminated, and the buyer may have to outbid the other offers. Using the term “backup” is not as clear as it should be. If you were a lender who is losing money and the first offer makes you $20,000 less than a second offer, which one would you approve and which one would you disapprove? Since the short sale does not close without the lender’s approval, having the lender disapprove the first offer makes the second one more than a backup offer.

I am working on a short sale in a townhouse in North Raleigh where there is a first mortgage and a line of credit as a second loan. We have had five offers. I started the lender review process with the first offer that was extremely low, but it gave me an opportunity to get on the waiting list. The seller signed it, with the short sale addendum, and we submitted it to both lenders, as both of them would be short in the payment. By the time the file was assigned to a loss mitigation negotiator, we had gone through four more offers. The last one was good enough that only the second loan is a short pay. By the time the last offer came in, the second loan had agreed to accept $2,000 on a prior offer, but I had no approval on the first loan, so the contract still had a contingency. The best offer fully paid the first loan and gave the second loan more than $3,000. Maybe the key to financial recovery is good marketing and better negotiating skills in short selling a home, so that more money is returned to the banks and the homes sell for higher values to support the neighborhood values.

By the way, every time we received a better offer on this townhouse, we went back to the previous offer and gave them a chance to submit their “last, best and final” offer. You need to give all buyers, and all buyer’s agents, every opportunity to be the successful purchaser in a short sale. The Realtors work hard trying to get a house for their clients and you need to give them every chance to get a commission. For more on negotiating when there are multiple offers, see my book Create A Great Deal, the Art of Real Estate Negotiating.

The fifth point is to tell the buyer not to spend any significant amount of money on the short sale until the lender has approved the short payment. The California Short Sale Addendum is one of the best. It is right in specifying that the time limits in the contract run from the time that the lender approves the short sale. Normally, the time limits run from when the contract is signed by the buyer and seller. In a short sale, you should start the time for inspections, loan applications and other contingencies from when the lender approves the sale.

I had a short sale in North Raleigh where the agent for the buyer was an old friend of mine. She did not pay attention when I told her the house was still on the market and that other offers could outbid her clients. The buyer paid for an inspection of the property about a week after the seller signed the contract. I should have been more emphatic in stopping the inspection, but I thought no one else would make an offer on the short sale home as it backed up to a noisy road. When another offer outbid her client, and her client would not raise his price, I did manage to get the buyer reimbursed for the cost of the inspection. But, she is still mad at me. So, learn from my experience and emphatically make sure the buyer does not do anything until the lender has accepted the short sale.

A sixth expectation for a short sale is that the lender is going to try to negotiate to get more money. One potential aggrivation in a short sale is a lender who takes a long time reviewing a short sale, while the values in the area are going down. Then, the lender wants more money to approve the short pay. If the lender comes back quickly with a higher counter offer, it is easier to present to the buyer, as the comparable values may support it. If the lender comes back after an extended period of decline in the values, it is harder to get the buyer to accept the counter offer, because it is harder to have the comparable values support it. Also, it is harder for the appraisal for the buyer’s loan to come in at the purchase price. Luckily, the values in Raleigh are not declining, or just barely declining, so I do not have this problem. But, you need to set the expectation for the agent for the buyer that there may be a counter offer from the bank.

A short sale is a different type of transaction altogether, so you need to explain the differences to the buyer’s agent and the buyer so that they have a home buying experience that is as pleasant as possible.

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