If you have an FHA mortgage your loan is insured by HUD. HUD has their own short sale program known as the FHA PFS (Pre-Foreclosure Sale) program.
The FHA PFS Program was originally introduced in the 1990’s to help homeowners in default with FHA mortgages avoid foreclosure and free them of their mortgage obligation, when a sale of the property would not produce adequate proceeds to pay off the loan. There have been many minor changes to the program over the last 25 years but the basic ideas have not changed.
FHA provides full debt forgiveness for those who qualify into the PFS program and participate in good faith whether or not they successfully sell their home. All customary real estate closing costs are paid out of proceeds, making this a no cost solution for most (though not all) homeowners.
There are two types of FHA PFS programs. One for owner occupants and another for those who no longer live in the home:
Owner occupant homeowners must:
- Document a financial hardship associated with keeping the home
- Be evaluated for other workout options such as loan modification
Non-owner occupants can only qualify for the FHA streamline program, which requires they:
- Are at lest 90 days+ in default
- Have a credit score below 620
Assuming the homeowner qualifies into the program, their lender will order an appraisal of the home, and then issue an ATP (Approval To Participate) in the PFS program.
The ATP is valid for 120 days, during which a sale meeting the terms of the letter will be approved. During this time any foreclosure activity will be postponed so that the owner can proceed to sell the property.
Once a sale meeting the terms is approved, an approval letter naming the buyer will be produced and the sale can close as any other, with qualifying owner occupants even receiving $3,000 relocation assistance at closing.