Preforeclosure Sale
Frequently Asked Questions

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The Preforeclosure Sale (PFS) Program allows the mortgagor in default to sell his/her home and use the net sale proceeds to satisfy the mortgage debt even though these proceeds are less than the amount owed.

Question 1 : Can a mortgagee utilize the buyer's appraisal to review the property that is accepted into the PFS or must the mortgagee acquire an independent one?

Answer: The mortgagee is required to obtain an appraisal per Mortgagee Letter 94-45, Paragraph E, "Steps Leading to - and Participation In - The PFS Procedure", Item #3, Pages 5-6. This requirement is because the property must be appraised on an As-Is and As-Repaired basis. However, if the buyer has secured an FHA-insured appraisal, use of the buyer's appraisal would be allowed since acquisition of an appraisal for HUD property cannot be duplicated within a six-month period.

Question 2: How does the mortgagee arrive at the 63% ratio of "as is" appraised value to outstanding debt and the 82% ratio of estimated sales proceeds to appraised value?

Answer - To arrive at the 63% ratio:

Divide the "As-Is Appraised Value" (APV) by the outstanding indebtedness (principal, accrued interest, and Partial Claim amount, if applicable). If the result is 63% or higher, that criterion has been met.

Answer - To arrive at the 82% ratio:

Contract sales price minus (allowable PFS expenses + Partial Claim amount, if applicable) divided by As-Is Appraised Value = Net Sales Proceeds. If the result is 82% or higher, that criterion has been met.

There are no variances from the above stated ratios.

Question 3: Mortgagor is deceased, his father has been making the payments, property was tenant-occupied for eight months, and now the father wants to know if he can acquire the property under the PFS Program?

Answer: Mortgagee Letter 1994-45, paragraph F, Item 7(a), states in part any PFS proposed by the mortgagor or his agent, and approved by the mortgagee, must be an "arm's length" transaction between the mortgagor and would-be purchaser. HUD defines "arm's length" transaction as between two unrelated parties that are characterized by a selling price and other conditions that would prevail in an open market environment. No hidden terms or special understandings can exist between any of the parties involved in the transaction. Consequently, the deceased mortgagor's father cannot buy the property using the PFS Program.

Question 4: If a mortgagee is the holder of both the first and second mortgages can the mortgagee be able to utilize the $1,000 that is available to pay towards the settlement of the second mortgage?

Answer: Yes, Mortgagee Letter 2000-05, page 31-32, paragraph F, "Condition of Title" states, "The incentive consideration payable to the mortgagor should first be applied toward the discharge of liens. If this is not sufficient, the mortgagee can obligate an additional amount not to exceed $1,000 from sales proceeds towards the discharge of liens or encumbrances, if that will result in clear title and allow the sale to proceed."

Question 5: Can a mortgagee proceed through the PFS Program process if one of the mortgagors is uncooperative and will not participate within the required Housing Counseling session?

Answer: As the mortgagee, you can facilitate this counseling to the uncooperative mortgagor and acquire their signature on the form HUD-90038, Homeownership Counseling Certification.

Question 6 : Is it possible to do a PFS after the mortgagee has already completed a Partial Claim?

Answer: PFS may follow a Partial Claim if there is a new reason for default and the mortgagor lacks the financial ability to cure the present default. See PFS Question #2 for calculations to meet the PFS ratios.

Question 7: Can a buyer utilize the Nehemiah type financing programs in conjunction with a purchase of a house that has been approved to participate in the PFS Program?

Answer: No, Nehemiah mortgages are disallowed, when the buyer is obtaining FHA financing to purchase a house that is participating in the PFS Program.

Question 8: A mortgagor approved to participate in the PFS Program has listed the property with a real estate agent who is a relative, but has agreed not to charge a sales commission to handle the transaction. Would this be considered an arm's length transaction?

Answer: No, Mortgagee Letter 1994-45, defines "arm's length transaction" as a preforeclosure sale between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment. In addition, no hidden terms or special understandings can exist between any of the parties involved in the transaction: buyer, seller, appraiser, sales agent, closing agent and mortgagee.

Question 9: What kind of "hardships" does a mortgagor has to have experienced in order to qualify for the PFS Program?

Answer: Mortgagee Letter 2000-05, Paragraph B. Cause of Default, page 4, states "HUD does not have a "hardship" test. Mortgagees may offer FHA relief options to mortgagors who have experienced a verifiable loss of income or increase in living expenses to the point where the mortgage payments are no longer sustainable."

Answer: Mortgagee Letter 2000-05, Paragraph F. Condition of Title, Page 31, states in part, "..the lender must obtain a title search or preliminary report to verify that the title is not impaired with un-resolvable title problems, or junior liens that cannot be discharged as allowed by HUD...If the borrower has a HUD Title I loan secured by the property, the lender must negotiate a release of the Title I lien in order to proceed with a PFS."

The mortgagor is then accepted into the PFS program and resolution of the title issues can be pursued concurrent with marketing. The incentive consideration payable to the mortgagor should first be applied toward the discharge of liens. If this is not sufficient, the mortgagee can obligate an additional amount not to exceed $1,000 from sale proceeds towards the discharge of liens or encumbrances.