The process for a short sale with an FHA loan is different from one with a conventional loan. The borrower must first be approved into the HUD’s Pre-foreclosure Sale Program before the bank can begin to negotiate the purchase offer.
The forms needed for this are 90036 (Application to Participate) and 90038 (Homeownership Counseling Certification).
Before the homeowner can be approved, an appraisal has to be done to assess the current value of the property. Other criteria are:
The borrower must be 31 days delinquent or more at the time of the short sale closing.
The property must be owner occupied – no ‘walk-aways’.
HUD will pay up to $1000 to the borrower as an incentive if the sale is closed within 90 days of application to the PFS program. (Given the time banks take to negotiate a deal, we can’t see this money ever being paid, but….)
HUD will pay up to $1000 for discharge of junior liens, but the borrower’s $1000 must be used first.
Appraised value must be at least 63% of the outstanding mortgage debt, which includes principal and interest. (Now, this is the problem in Las Vegas where prices have fallen to as low as 50% of original value!)
Net sales proceeds must be at least 82% of the property’s ‘as-is’ appraised value.(This does not give an investor much to play with!)
Repairs must be less than 10% of the ‘as-repaired’ appraised value.
The property must be listed with an unrelated realtor.
There is a maximum 120-day period to secure the sale which must, of course, be ‘arms length’ and should close within 6 months of the program approval.
VA Short Sales
Banks that issue VA loans will require proceeds of a short sale to be greater than or equal to 88% fair market value. (This does not leave much of a profit margin for an investor, so we would have to look at each deal on its merits before agreeing to purchase the property.)
The biggest advantage to affecting a VA ‘sale in compromise’ is a short sale on a VA loan may protect the homeowner’s eligibility to obtain future VA mortgages, unlike a DIL or foreclosure.
