FHA Loan Short Sales: A Complete Guide for Homeowners

If you’re struggling to make mortgage payments on your FHA-insured home, a short sale may offer a way out A short sale allows you to sell your home for less than what you owe on the mortgage, providing an alternative to foreclosure

Short sales involving FHA loans have specific program rules and requirements As a homeowner, it’s crucial to understand how FHA short sales work before proceeding

In this comprehensive guide, we’ll explain

• What is an FHA short sale?
• FHA short sale requirements
• The short sale process with an FHA loan
• Pros and cons of FHA short sales
• Alternatives to short selling an FHA home

Let’s dive in and uncover everything you need to know about short selling a home with an FHA mortgage.

What is an FHA Short Sale?

An FHA short sale, also called a preforeclosure sale, allows a homeowner with an FHA-insured mortgage to sell their home for less than the balance owed on the loan.

In a short sale:

• The home is sold to a new buyer at fair market value, even if that’s lower than what you owe.
• The lender accepts the proceeds from the sale as full payment on the mortgage.
• The shortfall between the sale price and loan balance is forgiven.

Short sales provide an alternative to foreclosure, allowing the homeowner to exit the property without a damaging foreclosure on their record.

The FHA Short Sale Program has specific guidelines and requirements for FHA-insured mortgages.

FHA Short Sale Requirements

To qualify for the FHA’s preforeclosure sale program, you must meet certain criteria:

• You must be at least 30 days delinquent on your FHA mortgage payments.
• The home must be your primary residence – investment properties don’t qualify.
• You must show financial hardship and inability to continue making payments.
• The short sale must be an “arm’s length transaction” – no conflicts of interest between parties.

In addition, the FHA has rules on minimum acceptable proceeds:

• First 30 days listed: 88% of appraised value
• Days 31-60 listed: 86% of appraised value
• After 60 days listed: 84% of appraised value

Meeting these requirements makes you eligible for the FHA’s short sale program.

The Short Sale Process on an FHA Loan

If you meet the requirements, here is an overview of the short sale process on an FHA-insured mortgage:

1. Evaluate options – Consider alternatives like loan modifications before deciding on a short sale.

2. List the home – Work with a real estate agent to list and market the home at fair market value.

3. Get pre-approved – Interested buyers will need to get pre-approved for financing. FHA buyers can obtain a new FHA loan.

4. Submit offer – Review offers to ensure they meet FHA minimum proceeds requirements.

5. Lender review – Submit short sale package to lender and wait for approval.

6. Closing – Once approved, proceed to closing with the buyer.

7. Forgiveness – The lender forgives the remaining mortgage balance after closing.

It’s critical to follow FHA guidelines throughout the process. Your real estate agent and closing company should understand FHA short sale requirements.

Pros and Cons of an FHA Short Sale

Short selling an FHA home has several key advantages:

Pros:

• Allows you to avoid foreclosure and damage to your credit.
• Debt is limited to the shortfall between sale price and mortgage balance.
• You may receive a $3,000 relocation incentive if you vacate quickly.
• Buyer can obtain a new FHA mortgage to purchase the home.

Cons:

• You must vacate and give up the home.
• The FHA has strict proceed minimums you must meet.
• It can take several months to complete an FHA short sale.
• You may owe income tax on any forgiven mortgage debt.

Overall, a short sale is preferable to foreclosure in most cases. But make sure you understand the tradeoffs before proceeding.

Alternatives to Short Selling an FHA Home

Beyond a short sale, homeowners with FHA loans have alternatives to explore:

• Loan modification – Adjust loan terms to make payments affordable.

• FHA Partial Claim – Receive an interest-free loan from HUD to bring mortgage current.

• Deed-in-Lieu of Foreclosure – Voluntarily deed home to lender instead of going through foreclosure process.

• Bankruptcy – Chapter 13 bankruptcy can pause foreclosure and restructure debts.

• Refinancing – If you have equity, a cash-out FHA Streamline Refinance may provide funds.

Always consult a housing counselor to weigh all options before deciding how to handle an unaffordable FHA mortgage.

Get Help with an FHA Short Sale

If you have an FHA loan and are interested in a short sale, be sure to follow program guidelines closely. Work with a real estate agent experienced in FHA short sales for the best results.

With professional help, you can make an FHA short sale as smooth as possible. Contact us today if you need assistance with an FHA short sale or exploring alternatives.