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
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.
FHA COVID 19 STREAMLINE
As of this writing, FHA is processing all short sales in a streamline fashion, which eliminates the need for financial documentation. This process is currently in place through April 2025 ( but may be extended). All lenders will have their own workout document for the seller to complete, but it is a simple form, and you will not need to collect tax returns, paystubs, or even document a hardship. You will only need to have the seller complete the workout form, and send it in with your sale documents ( purchase contract, estimated HUD, buyers proof of funds ) a long with any required addendums.
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. 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.
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 will be offered a deed in lieu which will also result in full debt forgiveness.