Understanding the FHA Pre-Foreclosure Short Sale Process

All short sales are not alike—especially when an FHA-insured mortgage is involved. FHA short sales must advance through a very exact and systemized process. Here’s what you need to know:

Before a Short Sale Can Be Initiated

The U.S. Department of Housing and Urban Development (HUD) requires that the homeowner be reviewed for all home retention options (modification) before a short sale is pursued. This 30- to 90-day process seeks to determine whether a legitimate hardship exists and if a short sale is appropriate. The review also will certify that the home has not been rented for more than 18 months and is being maintained, that there is a marketable title and that the property has only one FHA-insured loan.

A listing agreement or offer is not required in order to be approved. Once the homeowner is approved to short sell their home, foreclosure is put on hold and the homeowner receives an Approval to Participate (ATP) letter. A bank does not begin negotiating the purchase contract until after the homeowner is approved to participate and has returned a signed “wet ink” copy of the ATP within seven days of the date of issuance. If the ATP is not returned within seven days, the agreement will be canceled.

Homeowner Involvement

FHA short sales must be initiated by the homeowner, not an agent. Homeowners are also required to actively participate in the short sale process, including returning documents within the required time frames and maintaining contact with the mortgage servicer.

Agent Involvement

The seller’s agent needs to work with the homeowner to make sure the following items are organized and completed once the ATP has been executed and returned to the bank. First, the agent will thoroughly review the Welcome Package with the homeowner. Then, begin gathering the documents necessary for the process, being sure they are signed and dated where necessary. Those include:

- Pay stubs (dates, amounts, names, institutions)
- Hardship letter
- Marketable title
- Bank statements (all pages, accounts and borrowers)
- Occupancy certificate

Next, the agent will schedule a home appraisal with the homeowner (if the property is occupied) and the assigned appraiser. It is the agent’s responsibility to coordinate the appraiser’s access to the property and to inform the short sale specialist of any appraisal issues. The appraisal determines the listing price and allows you to execute a listing agreement. Provide the short sale specialist with the listing agreement, proof that the utilities are on and a current Multiple Listing Service (MLS) sheet. You must provide the short sale specialist with a MLS sheet every 30 days until the property is sold.