FHA Pre-Foreclosure Sale (PFS)
High foreclosure rates continue to have devastating effects on families and neighborhoods. The Federal Housing Administration (FHA) remains committed to taking actions to help families avoid foreclosure.
Since being introduced as a national program in 1994, the PFS Program has helped thousands of homeowners in default to avoid foreclosure. The PFS Program can help families who are facing foreclosure. The PFS loss mitigation option allows a homeowner in default to sell his or her home and use the sale proceeds in satisfaction of the mortgage debt when the proceeds are less than the amount owed.
To facilitate greater use of this program, FHA has consolidated the requirements of the PFS Program that have been issued over the years, and has updated and clarified those requirements where needed, to better address the problems faced by homeowners and provide greater flexibility in considering a homeowners candidacy for participation in this program.
Key Features of the PFS Program
Establishing Market Value –Properties in the PFS program are sold at or near fair market value as established by an independent appraisal, prepared by an appraiser on the FHA Appraisal Roster.
Minimum List Price Requirements – Properties offered for sale under the PFS program are to be listed for sale at no less than the "as-is" appraised value as determined by a current FHA appraisal, obtained and reviewed by the Bank/mortgaee.
Negative Equity – The ratio of 63% for the fair market value (FMV) to the outstanding mortgage balance (including unpaid principal and accrued interest) has been updated to address events in the current housing market, and replaced with tiered net sales proceeds.
Tiered Net Proceeds Requirement – Incorporates guidelines for varying minimum net sales proceeds based on the length of time a property has been competitively marketed for sale.
Marketing Documentation – Prior to accepting a discounted offer, evidence of competitive marketing from the selling broker is to be presented and lenders are to retain this documentation in the claim review file.
Non-owner Occupant Exceptions – Lenders are authorized to grant reasonable exceptions to non-occupant mortgagors when documentation indicates a property was not purchased as a rental or used as a rental for more than 18 months, immediately preceding the approval into the PFS program.
Removal of Repair Limitations –With prior approval from HUD, properties with surchargeable damage (i.e., damage caused by fire, flood, earthquake, hurricane, boiler explosion or neglect) may be eligible for the PFS program if funds - sufficient to cover the government’s estimated repair costs - are applied to reduce the outstanding debt when a claim is filed.
Increase in Funds Available for Discharge of Subordinate Liens – In instances where a homowner has made an initial contribution/incentive of $750 or $1,000, the amount that can be used from sales proceeds for the discharge of liens or encumbrances (which represent an impediment to conveyance of marketable title) has been raised from $2,000 to $2,500.
Change in Allowable Closing Costs – Subject to the stated ratios, HUD allows up to 1% of the buyer’s mortgage amount for closing costs to be included in the "Seller’s Costs" on the HUD-1 for all transactions that involve a new FHA-insured mortgage.