If you purchased your home with an FHA loan and have suffered a job loss or other financial hardship that makes you unable to afford your mortgage payments, a short sale may be one of the options available to you.

The Federal Housing Administration (FHA) – which is part of HUD – insures FHA loans, reducing the lender’s risk. With FHA loans, as with conventional and VA loans, the short sale process involves a lender agreeing to accept less than the payoff balance on the loan. However, HUD has defined clear guidelines under which FHA short sales may occur.

Overview of HUD Short Sale Guidelines

  • To be eligible for an FHA short sale, you must typically be delinquent on payments by at least 31 days, must occupy the property, and must provide documentation showing a verifiable increase in expenses or reduction in income.
  • You must be approved to participate in the pre-foreclosure sales program before your lender can consider an offer.  The lender will review your hardship package (all of the documents showing the increase in expenses and/or reduction in income) and order an appraisal to determine the market value on your home. 
  • Once you’re approved, HUD will allow the short sale to proceed with reasonable costs of sale included in the transaction, such as broker commissions and customary closing costs.
  • HUD also allows buyers to ask for up to 1% of their loan amount in closing costs if they are purchasing the home with an FHA loan.  Buyers who wish to use conventional or VA loans may not request any closing costs.  (Should you reach the point of negotiating an offer with a buyer, be sure to clarify whether they plan to use FHA financing, and remind them that HUD defines the only allowable closing costs and they are not negotiable.)
  • HUD does not allow repair allowances or reimbursements, home warranties, loan fees or discount points for non-FHA loans, or lender’s title insurance.
  • You can receive a seller’s incentive of up to $1,000 if the sale closes within 3 months from the date of application, or $750 after that. This amount can be used to cover disallowed expenses requested by the buyer (such as a home warranty) or other expenses, as needed.
  • For a short sale offer to be approved, it must conform to all of these requirements, and there must be enough money after all of the closing costs and brokers fees for the lender to receive a minimum percentage of market value (either 88%, 86%, or 84% of market value, depending on the number of days the home is on the market).

Review the complete set of guidelines here: HUD Pre-Foreclosure Sales Program

To find out whether a short sale is right for you, call us at (512) 522-4990 today.