A Preforeclosure sale allows the homeowner in default to sell their home and use the net sale proceeds to satisfy the mortgage debt, even if it less than the amount owed.
Question 1 – Can a homeowner utilize the buyer’s appraisal to review the property that is accepted into the preforeclosure sale (PFS)?
The homeowner is required to obtain an appraisal. The property must be appraised on as-is condition and as-repaired basis. However, if the buyer has secured an FHA-insured appraisal, use of the buyer’s appraisal is allowed since acquisition of an appraisal for HUD property cannot be duplicated within a 6 month period.
Question 2 – How does a mortgagee arrive at the 63% ration of “as is” appraised value to outstanding debt and the 82% ratio of estimated sales proceeds to appraised value?
To arrive at the 63% ratio: Divide “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, the criterion has been met.
To arrive at the 82% ratio: Contract sales price minus (allowable PFS expenses + Partial Claim amount) divided by As-Is Appraised Value = Net Sales Proceeds. If the result is 82% or higher, the criterion has been met.
Question 3 – A mortgagor approved to participate in the PFS Program listed the property with a real estate agent who is a relative, but has agreed to not charge sales commission. Would it be considered an arm’s length transaction?
No, the definition of “arm’s length” is a preforeclosure sale between 2 unrelated parties which would prevail in an open market. No hidden terms or special understandings can exit between the parties: buyer, seller, sales agent, appraiser, mortgagee, closing agent
Question 4 – What kind of hardships much a mortgagor have to experience to qualify for PFS?
HUD does not have a hardship test. Mortgagees may offer FHA relief options to mortgagors who have experienced a verifiable loss of income or increasing in living expenses to the point where the mortgage payments are no longer sustainable.
Question 5 – Is it the responsibility of the mortgagee to acquire marketable title?
The lender must obtain a title search or preliminary report to verify that the title is not impaired with un-resolved 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 it isn’t sufficient, the mortgagee can obligate an additional amount not to exceed $1,000 from sale proceeds towards the discharge of liens.