HOW TO PROCESS YOUR FHA SHORT SALE!
FHA has their own short sale program called the PFS (pre-foreclosure sale program). While the general short sale process is similar to others, FHA has a few tweaks you'll want to be aware of.
FHA SHORT SALE TIPS
THE PRE-APPROVED SHORT SALE
Unlike most others, FHA will start the short sale approval process before there is a buyer in place, which theoretically sounds great. However this presents a possible pitfall later, so I generally do not recommend getting the approval before going on market. The pitfall is due to the short-selling lenders appraisal. The single most common complication in the short sale process is a seller's appraisal that comes in too high. For this reason, I like to list short sales and ideally get them in contract before an appraiser ever sets foot in the property. That way the market has already set the value of the home and a listing history has already been established, which helps guide the appraisal to arrive at a value to support the sale. Having an appraisal prior to listing makes it much more likely that the appraised value comes in too high and the market won't meet it, causing significant issues for the short sale completion.
MARKETING
FHA requires a 14 day marketing time at appraised price or higher before the seller can enter into a contract. You will need to be able to document this time frame with an MLS history and listing agreement. You also won't know the lenders appraised price until later, so price to market, and reduce as needed. FHA actually allows you to get the home appraised and the seller approved prior to listing, but I don't recommend going this route as it frequently results in an elevated appraisal making it harder to sell the home.
Dealing with a HUD partial claim
Often, sellers who have been in a forbearance or have done any kind of loan modification with FHA will have a silent second lien against the property. You should be able to see this by searching title, or contacting HUD. Millions of new partial claims were written by HUD between 2020 and 2025 as part of Covid recovery programs. Sellers frequently are unaware of this partial claim, and periodically it is not even properly recorded. If it sounds like the seller has had prior issues with the mortgage, ALWAYS research to see if there is a partial claim out there. If there is, no problem. You will simply pull a payoff and put it on your HUD for full repayment. You cannot short a partial claim, as it must always be paid in full, but FHA allows this to come out of the net proceeds of the sale. If the partial claim amount exceeds the proceeds of the sale, you will not be able to close.
Closing the FHA short sale
FHA short sales are technically a 2 part process: Getting the seller approved into the FHA PFS Program, and then making sure the sale lines up with the terms as defined in that PFS Program. These processes can run concurrently. Once the lender issues the approval to participate in the PFS program, all terms of the sale will be defined in the letter, including acceptable net proceeds. As long as the purchase in place matches these terms, your sale will be approved. If the seller is an owner occupant and there are no junior liens, FHA allows $3,000 in relocation assistance to go to the seller (assuming the FHA required net is still met).
Keep in mind that all FHA short sales allow for full debt forgiveness, and that should the short sale fail in the duration of the PFS (Usually 4 months), the seller may be offered a deed in lieu which will also result in full debt forgiveness.