What Every Seller Should Know About FHA Short Sales

An FHA short sale is different than a short sale involving a conventional loan.  In many respects, facilitating an FHA short sale is much easier than facilitating a conventional loan short sale.  The primary reason for this is that in most case involving an FHA loan, the seller and listing agent will know very early on how much the bank expects to net fairly soon after the property has been listed.

If a homeowner meets the FHA short sale requirements, the bank will issue an Approval to Participate which the seller must sign.  This document will set forth the exact amount of money the bank wants to net.  Having this information early in the listing process allows the seller and listing agent to price the property properly and to accept the offer than will ensure that the bank, at a minimum, nets the amount set forth in the Approval to Participate.

It's important to note, however, that not all banks issue the Approval to Participate at the beginning of the listing and marketing process.  If an offer comes in, the seller and agent have no way of knowing whether it will meet the lender's net requirement until the lender discloses the appraised value of the property or issues the Approval to Participate.  In instances where the Approval to Participate is issued several months after an offer on the property has been accepted by the seller, the parties may have to increase the purchase price to ensure that the bank nets the required amount.

A few key points to remember about FHA short sales follow.

1. Seller paid closing costs cannot exceed 1% of the buyer's loan amount (HUD may approve a variance under certain circumstances);
2. Seller must be at least 31 days behind on mortgage payments at the time of closing;
3. Bank expects to net:

• 88% of as-is appraised value during first 30 days of marketing;
• 86% of as-is appraised value between days 31 and 60 of marketing;
• 84% of as-is appraised value for the duration of the marketing period.

If there is an offer in play before the bank issues the Approval to Participate, it's important to remember that the Approval to Participate is not an approval of the offer.  Once the Approval to Participate has been issued, the bank will carefully review the offer to make sure that it meets all of HUD's short sale requirements and, if necessary, will make a counteroffer or ask the seller to make a monetary contribution to the deal.