III.A.2.l. Home Disposition Options (03/14/16)

Owned by Kacey Olson
Nov 25, 2018
28 min read

© HUD Single Family Housing Policy Handbook 4000.1

Included in this section are:

i. Definition

ii. Pre-Foreclosure Sales

iii. Deed-in-Lieu of Foreclosure

i. Definition

Home Disposition Options are the Loss Mitigation Options of PFS and DIL.

ii. Pre-Foreclosure Sales

(A) Definitions A Pre-Foreclosure Sale (PFS), also known as a Short Sale, refers to the sale of real estate that generates proceeds that are less than the amount owed on the Property and the lien holders agree to release their liens and forgive the deficiency balance on the real estate. There are three types of PFS transactions:

  • Streamlined PFS;
  • Streamlined PFS for Servicemembers with Permanent Change of Station (PCS) Orders; and
  • Standard PFS.

(B) Eligibility

(1) Defaulted Mortgage Status The Mortgagee may consider the PFS Option for Borrowers who are in Default or who are current but facing Imminent Default. The Borrower need not be in Default for Mortgagee approval of the PFS option; however, on the date the PFS closing occurs, the Mortgagee must ensure that the Mortgage is in Default status (minimum 31 Days Delinquent).

(2) Borrower Eligibility

(a) Streamlined PFS

(i) Definition A Streamlined PFS is a PFS Option available for Owner-Occupant and Non-Occupant Borrowers and does not require verification of hardship.

(ii) Streamlined PFS Standards The Mortgagee must ensure that Non-Occupant Borrowers meet the following requirements:

  • Borrower(s) are 90 Days or more Delinquent on their FHA-insured Mortgage as of the date of the Mortgagee’s review; and
  • each Borrower has a credit score of 620 or below.

The Mortgagee must ensure that Owner-Occupant Borrowers meet the following requirements:

  • Borrower(s) are 90 Days or more Delinquent on their FHA-insured Mortgage as of the date of the Mortgagee’s review;
  • each Borrower has a credit score of 620 or below; and
  • Borrowers must have been reviewed for Loss Mitigation Home Retention Options as follows:
    • the Borrower has failed a TPP within the last six months;
    • the Borrower has failed on an FHA-HAMP Option or Loan Modification within the last two years;
    • the Borrower has been deemed ineligible for a Loss Mitigation Home Retention Option;
    • the Borrower received an SFB - Unemployment but did not otherwise qualify for a permanent Loss Mitigation Home Retention Option by the end of the Special Forbearance period; or
    • the Borrower has been deemed eligible for and offered a Loss Mitigation Home Retention Option. However, each Borrower with a credit score below 580 must provide written documentation that they choose not to accept the Loss Mitigation Home Retention Option offered by the Mortgagee.

(iii) Eligible Properties The Mortgagee may offer the Streamlined PFS process for all Properties securing FHA-insured Mortgages, provided that all Borrowers meet all program requirements. Such Properties may be vacant but cannot be condemned.

(b) Streamlined PFS for Servicemembers with PCS Orders

(i) Definition A Streamlined PFS for Servicemembers with PCS Orders is a Streamlined PFS that may be offered to servicemembers who must relocate to a new duty station at least 50 miles away from their existing residence, without the Mortgagee verifying hardship.

(ii) Streamlined PFS for Servicemembers with PCS Orders Standards The Mortgagee must ensure that servicemembers meet the following requirements for a Streamlined PFS for Servicemembers with PCS Orders:

  • The servicemember has PCS Orders to relocate to a duty station at least 50 miles away from their existing residence and provides the Mortgagee with a copy of such orders.
  • The servicemember submits an affidavit certifying that:
    • the Property securing the FHA-insured Mortgage is or was their Principal Residence when the PCS orders were issued; and
    • new permanent housing has been or will be obtained as a result of the orders.

(iii) Eligible Properties The Mortgagee may offer the Streamlined PFS process for all Properties securing FHA-insured Mortgages, provided that all Borrowers meet all program requirements. Such Properties may be vacant, but cannot be condemned.

(c) Standard PFS

(i) Definition A Standard PFS Option is a PFS Option available for Owner-Occupant Borrowers who are experiencing a hardship affecting their ability to sustain their Mortgage, as determined by the Deficit Income Test (DIT) and:

  • are in Default; or
  • are current or less than 30 Days past due but facing Imminent Default due to a hardship as described in the Eligible Borrowers section.

(ii) Standard PFS Standards The Mortgagee must first assess whether the Borrower meets the requirements of a Streamlined PFS Option, prior to reviewing the Borrower for a Standard PFS.

(iii) Eligible Properties The Mortgagee may offer the Standard PFS process for all owner-occupied Properties securing FHA-insured Mortgages, provided that all Borrowers meet all program requirements.

(iv) Eligible Borrowers The Mortgagee may consider for Standard PFS transactions those Borrowers in Default or in Imminent Default due to one or more of the following hardships:

  • a loss of or reduction in income that was supporting the Mortgage;
  • a change in household financial circumstances;
  • death of a co-Borrower;
  • long-term/permanent illness or disability of a Borrower or dependent Family Member;
  • divorce or legal separation of a Borrower; or
  • distant employment transfer or relocation greater than 50 miles one-way from the Borrower’s current Principal Residence to be closer to employment.

(v) Required Imminent Default Documentation When approving a Borrower for a Standard PFS based on the Borrower’s Imminent Default for one of the reasons listed in the Eligible Borrowers section above, the Mortgagee’s Claim Review File must include the following:

  • evidence of the Borrower’s Imminent Default hardship(s); and
  • evidence that the DIT results in a negative value.

(vi) Required Financial Documentation for Standard PFS Prior to approving a Borrower for a Standard PFS, the Mortgagee must obtain the following documentation of the Borrower’s finances:

  • for DIT, at least one of the following:
    • at least two of the Borrower’s most recent pay stubs or, if self-employed, the most recent quarterly or year-to-date profit and loss statement, compiled by a Certified Public Accountant (CPA);
    • the Borrower’s Social Security Income (SSI) statements and/or disability payment statements, if applicable; or
    • the Borrower’s most recent Form W-2, Form 1099, or federal tax return; and
  • for Cash Reserve contribution calculations, all of the following:
    • the three most recent monthly bank statement(s);
    • the three most recent months of brokerage statement(s); and
    • the most recent federal tax return at the time the Borrower requests an approval for a Standard PFS.

(vii) Deficit Income Test for Standard PFS Definition The Deficit Income Test (DIT) is a financial analysis test used for Standard PFS transactions to determine if a Borrower can sustain their Mortgage. Verification of Income and Expenses For Standard PFS transactions, to determine a Borrower’s income and expenses for the DIT, the Mortgagee must:

  • verify the Borrower’s monthly net income by obtaining one of the following:
    • at least two of the Borrower’s most recent pay stubs or, if self-employed, the most recent quarterly or year-to-date profit and loss statement, compiled by a CPA;
    • the Borrower’s SSI statements and/or disability payment statements, if applicable; or
    • the Borrower’s most recent Form W-2, Form 1099, or federal tax return; and
  • verify the Borrower’s monthly expenses by ensuring that all expenses on the Borrower’s credit report are factored into the DIT along with any other expenses that are supported by bills, payment receipts, and/or the standard payment amounts under an IRS Index (such as the IRS Collection Financial Standards). For large past-due balances or for accounts included in bankruptcy proceedings, the Mortgagee should refer to the minimum monthly payment required prior to the delinquency when using the DIT.

DIT Calculation

In performing the DIT, the Mortgagee subtracts the Borrower’s total monthly expenses from the total monthly net income.

DIT Results

A DIT yielding a negative amount indicates that the Borrower’s expenses exceed their income each month and thus a PFS may be an appropriate Loss Mitigation Option for the Borrower.

The Mortgagee must review a Borrower with a positive DIT amount for Loss Mitigation Home Retention Options, unless that Borrower was previously denied for those options or if that Borrower qualifies for a Streamlined Option.

(viii) Exceptions for Non-Owner Occupants in Standard PFS Transactions HUD authorizes Mortgagees to grant exceptions to Non-Occupant Borrowers when the following can be demonstrated:

  • need to vacate: the non-occupancy was related to the cause of Default; and
  • not purchased/used as rental: the subject Property was not purchased as a rental or used as a rental for more than 18 months prior to the Borrower’s acceptance into the PFS Program.

(d) Corporations or Partnerships Requesting PFS Option The Mortgagee must submit a variance request to use the PFS Option to the NSC via EVARS when the Property is owned by a corporation or partnership.

(3) Property Condition

(a) Surchargeable Damage

(i) Definition Surchargeable Damage is damage to a Property caused by fire, flood, earthquake, tornado, boiler explosion (for condominiums only) or Mortgagee Neglect.

(ii) Standard The Mortgagee is responsible for the cost of Surchargeable Damage.

(iii) PFS Request for Damaged Property The Mortgagee must request NSC approval via EVARS before approving the use of the PFS Option for a Property with Surchargeable Damage as follows:

  • The Mortgagee must first obtain the Government’s Estimate of the Cost to Repair the Surchargeable Damage by contacting HUD’s Mortgagee Compliance Manager (MCM).
  • Upon receipt of the Government’s Estimate of the Cost to Repair, the Mortgagee must submit form HUD-90041, Request for Variance: Pre-foreclosure Sale Procedure, via EVARS to obtain NSC approval prior to entering into a PFS Agreement with the Borrower. The Mortgagee must note on the variance request the specific reason for the request and attach any supporting documents needed for the NSC’s review.

(iv) “As-Is” Subject to Surchargeable Damage If the Property is being sold “As Is” subject to the Surchargeable Damage, the Mortgagee must deduct the Government’s Repair Cost Estimate of the damage from its PFS Claim.

(v) “As Repaired” Subject to Surchargeable Damage If the Property is being sold “As Repaired” and funds for surchargeable repairs will be escrowed or provided as a credit to the Borrower at closing, the Mortgagee must not include in its Net Sale Proceeds calculation the amount of the repair escrow or repair credit.

(b) Damage other than Surchargeable Damage If the damage is not considered Surchargeable Damage, the Mortgagee is not required to obtain NSC approval prior to approving the PFS Agreement.

(c) Hazard Insurance Claim Where applicable, the Mortgagee must work with the Borrower to file a hazard insurance claim and either:

  • use the proceeds to repair the Property; or
  • adjust the PFS Claim by the amount of the insurance settlement (Non-Surchargeable Damage) or the Government’s Repair Cost Estimate.

(d) Disclosure of Damage after PFS Approval In the event the Mortgagee becomes aware that the Property has sustained significant damage after a Borrower has received the Approval to Participate in the PFS Program, the Mortgagee must re-evaluate the Property to determine if it continues to qualify for the PFS Program or terminate participation if the extent of the damage changes the Property’s Fair Market Value (FMV).

(4) Condition of Title The Mortgagee must ensure that all FHA-insured mortgaged Properties sold under the PFS Program have marketable title. Before approving a Borrower for participation in the PFS program, the Mortgagee must obtain a title search or preliminary report verifying that the title is not impaired by:

  • unresolvable title problems; or
  • junior liens that cannot be discharged as permitted by HUD.

(C) PFS Outreach Requirements

(1) Form HUD-90035When a Borrower has expressed an interest in participating in the PFS program or has been identified by the Mortgagee as a qualified candidate for the PFS Program, the Mortgagee must mail form HUD-90035, Information Sheet: Pre-foreclosure Sale Procedure, adding its toll-free or collect telephone number to the form.

(2) Disclosure Requirements for PFS Transactions Before approving the Borrower for the PFS Option, the Mortgagee must notify the Borrower in writing of the following:

  • The Mortgage must be in Default on the date the PFS transaction closes, pursuant to section 204(a)(1)(D) of the National Housing Act, 12 U.S.C. 1710.
  • PFS transactions are reported to consumer reporting agencies and will likely affect the Borrower’s ability to obtain another Mortgage and other types of credit.
  • If the Borrower is a servicemember, it is recommended that the Borrower obtain guidance from their employer regarding the PFS’s impact on their security clearance and employment.
  • PFS transactions are reported to the Credit Alert Verification Reporting System (CAIVRS), which could result in their inability to obtain government financing or affect other government benefits for a certain period of time.

(D) Owner-Occupant Borrower Compensation

(1) Compensation Amount HUD offers Owner-Occupant Borrowers who act in good faith and successfully sell their Properties using the PFS Option a compensation of up to $3,000 as follows:

  • The Owner-Occupant Borrower who is required to make a Cash Reserve contribution may only receive the amount necessary to satisfy those costs, up to the $3,000 consideration limit.
  • The Owner-Occupant Borrower who is not required to make a minimum Cash Reserve contribution may receive any remaining amount for transition or relocation assistance only.

(2) Use of Compensation The Owner-Occupant Borrower may:

  • apply the entire amount of the $3,000 compensation or a portion of it to resolve junior liens; and/or
  • offset the sales transaction costs not paid by HUD (including a home warranty plan fee, costs of optional repairs, and the buyer’s closing expenses).

The Mortgagee must instruct the Closing Agent to:

  • pay the HUD relocation or transition assistance from Net Sale Proceeds; and
  • itemize on the Closing Disclosure or similar legal document any relocation or transition assistance received by HUD or from other entities.

(3) Required Documentation The Mortgagee must ensure that the Closing Disclosure or similar legal document accurately reflects the use of any Borrower compensation amount.

(E) Cash Reserve Contributions for Standard PFS Transactions

(1) Definition Cash Reserves include all non-retirement liquid assets available for withdrawal or liquidation from all financial institutions. Such accounts include, but are not limited to, the following:

  • brokerage, mutual funds, checking, savings, money market or certificate of deposits, other depository accounts, and stocks;
  • other equity instruments such as marketable debt of federal, state, or local governments, Government-Sponsored Enterprises (GSE), corporations and other businesses; and
  • other securities and commodities (including futures, traded on an exchange or marketplace generally available to the public) for which values can be readily verified using Schedules B (Interest & Dividends), D (Capital Gains & Losses) and E (Supplemental Income & Loss) of the Borrower’s most recent federal tax return.

(2) Standard Before approving a Borrower to participate in a Standard PFS transaction, the Mortgagee must:

  • calculate the total Cash Reserves using the highest ending balance of each Cash Reserve asset; and
  • disclose to the Borrower the amount of the Borrower’s Cash Reserve contribution to be applied towards the Standard PFS transaction.

HUD does not require Cash Reserve contributions for Streamlined PFS transactions.

(3) Cash Reserve Contribution Threshold The Cash Reserve contribution threshold is $5,000.

(4) Cash Reserves Greater than the Threshold The Mortgagee must require the Borrower with Cash Reserves greater than the contribution threshold to contribute 20 percent of the total amount exceeding the contribution threshold towards the mortgage debt. The Mortgagee must not require the Borrower to contribute more than the difference between the unpaid principal balance and the appraised value of the Property.

(5) Cash Reserves At or Below the Threshold Amount If the Cash Reserve calculation returns an amount at or below the contribution threshold amount, or a negative amount, the Mortgagee is not required to obtain a contribution from the Borrower in connection with the PFS transaction.

(F) PFS Program Participation Requirements

(1) Approval to Participate

(a) Definition A PFS Approval to Participate is an agreement signed by the Borrower to confirm their willingness to comply with the PFS Program requirements.

(b) Standard After determining that a Borrower and Property meet the PFS eligibility requirements, the Mortgagee must notify the Borrower by sending:

  • an Approval to Participate in the PFS Program (form HUD-90045, Approval to Participate), including the date by which the Borrower’s Sales Contract must be executed under Pre-Foreclosure Sale Marketing Period guidance; and
  • a Pre-Foreclosure Sale Addendum.

The Mortgagee must send these documents to the Borrower via methods providing confirmation or a timestamp of delivery.

The Mortgagee must receive the signed Approval to Participate within 10 Days of the date on the Approval to Participate.

(2) Use of Real Estate Broker

(a) Borrower Retention of Real Estate Broker The Borrower is responsible for retaining the services of a real estate broker/agent within seven Days of the date of the Approval to Participate.

(b) Required Listing Disclosure The Mortgagee must ensure that the established Listing Agreement between the seller and the agent/broker includes the following cancellation clause: “Seller may cancel this Agreement prior to the ending date of the listing period without advance notice to the Broker, and without payment of a commission or any other consideration if the Property is conveyed to the mortgage insurer or the mortgage holder. The sale completion is subject to approval by the mortgagee.”

(c) Real Estate Broker Duties The real estate broker/agent must market the Property within the pre-established timeframe stated in the Approval to Participate and list the Property in accordance with the property valuation requirements.

(d) Real Estate Broker Conflicts of Interest The real estate broker/agent selected must have no conflict of interest with the Borrower, the Mortgagee, the Appraiser or the buyer associated with the PFS transaction. The broker/agent must not claim a sales commission on a PFS of a broker’s/agent’s own Property or that of a spouse, sibling, parent, or child. Any conflict of interest, appearance of a conflict, or self-dealing by any of the parties to the transaction is strictly prohibited.

(3) Arm’s Length PFS Transaction

(a) Definition An Arm’s Length PFS Transaction is between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment and without hidden terms or special understandings existing between any of the parties (e.g., buyer, seller, Appraiser, sales agent, Closing Agent, and Mortgagee).

(b) Standard The Mortgagee must ensure that the following arms-length requirements apply to parties involved in PFS transactions:

  • Any PFS proposed by the Borrower or their agent and approved by the Mortgagee must be an Arm’s Length Transaction between the Borrower and prospective buyer, subject to the exceptions in the Permitted Non-Arms-Length Transaction section.
  • Except for real estate agents and brokers representing a party to the PFS, no party that is a signatory on the sales contract, including addenda, can serve in more than one capacity.
  • The broker hired to sell the Property must not share a business interest with the Mortgagee. If the Mortgagee knows that a shared interest exists between Appraiser and sales agent, the Mortgagee must note this in the Claim Review File.
  • All doubts will be resolved in a manner to avoid a conflict of interest, the appearance of conflict, or self-dealing by any of the parties.

(c) Permitted Non-Arms-Length Transactions HUD permits non-Arm’s Length PFS Transactions, to the extent necessary to comply with state law, where state law prohibits placement of an Arm’s Length Transaction requirement on property sales. If clauses (a) and (c) of the PFS Addendum are impermissible under state law, the Mortgagee may strike these clauses from the PFS Addendum prior to execution, provided that the transaction complies with all PFS program requirements.

(d) Relocation Service Contribution The Mortgagee may permit a Relocation Service affiliated with the Borrower’s employer to contribute a fixed sum towards the proceeds of the PFS transaction without altering the arms-length nature of the sale, so long as the result is an outright sale of the Property and cancellation of the FHA mortgage insurance.

(4) Mortgagee Monitoring of PFS Transaction The Mortgagee must monitor the PFS transaction in its entirety to ensure the Borrower’s compliance with the terms in the Approval to Participate and with all PFS Program requirements. The Mortgagee must terminate a Borrower’s participation in the PFS Program in the event of noncompliance.

(5) Property Maintenance The Mortgagee must inspect Properties during the PFS period if:

  • the Property is vacant;
  • the Mortgagee has reason to suspect that the Property has become vacant; or
  • the Borrower or Authorized Third Party has not maintained contact with the Mortgagee.

(G) Property List Price and Valuation

(1) List Price The Mortgagee must ensure that the Borrower lists the Property for sale at no less than the “As Is” value as determined by an appraisal completed in accordance with the requirements in the Appraiser and Property Requirements for Title II Forward and Reverse Mortgages section of this SF Handbook.

(2) Appraisals

(a) Standard The Mortgagee must obtain a standard electronically-formatted appraisal performed by an FHA Roster Appraiser pursuant to the following requirements:

  • The appraisal must contain an “As-Is” FMV for the subject Property.
  • A copy of the appraisal must be provided to the homeowner, sales agent, or HUD, upon request.

(b) Appraisal Validity Period The as-is appraisal used for a PFS transaction is valid for 120 Days. If a Mortgagee determines that a subsequent as-is appraisal is required, the Mortgagee may obtain a new as-is appraisal, even if the Property was appraised by an FHA Roster Appraiser within the preceding 120 Days.

(3) Request for Variance for Property Valuation

(a) standard A Mortgagee must submit a request for a variance through EVARS to approve a PFS transaction if one of the following conditions exists:

  • the current appraised value of the Property is less than the unpaid principal balance by an amount of $75,000 or greater;
  • the appraised value is less than 50 percent of the unpaid principal balance; or
  • the appraisal is deemed unacceptable because the as-is value cannot be affirmed using a Broker’s Price Opinion (BPO) or Automated Valuation Model (AVM) within 10 percent of the value.

(b) Variance Request The Mortgagee must note on the variance request the specific reason for the request and attach any supporting documents needed for HUD review. The Mortgagee must obtain approval before authorizing the marketing of the Property.

(4) Broker’s Price Opinions and Automated Valuation Models

(a) Standard When the appraisal has been deemed unacceptable, the Mortgagee must obtain a BPO or AVM that is within 10 percent of the value of the Property as determined by the as-is appraisal performed by an FHA Roster Appraiser. An acceptable BPO or AVM is one that is utilized by the Mortgagee in its existing standard business processes.

(b) Required Documentation The Mortgagee must retain in the Claim Review File a copy of the BPO or AVM supporting the Property Value.

(H) Pre-Foreclosure Sale Marketing Period

(1) Maximum Marketing Period The Borrower has four months from the date of the Borrower’s Approval to Participate to acquire a Contract of Sale.

(2) Minimum Marketing Period The Mortgagee must ensure that PFS Properties are listed in the Multiple Listing Service for a minimum of 15 Days before offers are evaluated. After this initial listing period, the broker/agent may evaluate offers as they are received. This 15-Day minimum marketing period must occur during the Marketing Period following the date of the Borrower’s Approval to Participate.

(3) Extension to PFS Marketing Period HUD provides an automatic two-month extension to the deadline to initiate foreclosure for completion of a PFS transaction under the following conditions:

  • the Mortgagee has an “A” TRS II/Tier 1 score under HUD’s TRS II; or
  • there is a signed Contract of Sale, but settlement has not occurred by the end of the fourth month following the date of the Borrower’s Approval to Participate in the PFS Program.

(4) Monthly Review of Marketing Status On a monthly basis, Mortgagees must review the Property’s marketing status with the Borrower and/or real estate broker/agent.

(5) Previously Initiated Foreclosures The Mortgagee must not cancel a foreclosure to initiate a PFS marketing period for a Property of a Borrower meeting the PFS eligibility requirements. The Mortgagee may only cancel a scheduled foreclosure sale if the Mortgagee has received an acceptable Contract of Sale that meets the PFS requirements.

(I) Evaluation of Offers

(1) Standard The Mortgagee must receive from the listing real estate agent/broker an offer that:

  • yields the highest net return to HUD; and
  • meets HUD’s requirements for bids.

The listing agent/broker must ensure that:

  • all offers submitted to the Mortgagee for approval are signed by both the seller and the buyer prior to submission; and
  • the PFS Addendum is signed by all of the applicable parties (except for the Closing Agent).

(2) Back-up Offers Once an offer has been submitted to the Mortgagee for approval, the listing agent/broker must retain any offer that the seller elects to hold for “back-up” until a determination has been made on the previously submitted offer.

(3) Required Documentation The listing agent/broker must retain all offers received, including offers not submitted for approval, in accordance with state law.

(J) Contract Approval by Mortgagee

(1) Standard In reviewing the Contract of Sale, the Mortgagee must:

  • ensure that the PFS sale is an outright sale of the Property and not a sale by assumption;
  • review the sales documentation to determine that there are:
    • no hidden terms or special agreements existing between any of the parties involved in the PFS transaction; and
    • no contingencies that might delay or jeopardize a timely settlement; and
  • determine that the Property was marketed pursuant to HUD requirements and that the minimum required Tiered Net Sale Proceeds have been met.

The following anti-fraud measures apply to PFS transactions:

  • A Mortgagee must not approve a Borrower for a PFS if the Mortgagee knows or has reason to know of a Borrower’s fraud or misrepresentation of information.
  • All parties involved in a PFS transaction must sign and date a PFS Addendum as a contingency for a PFS transaction to close.

(2) Sales Contract Review Period After receiving an executed Contract of Sale from the Borrower, the Mortgagee must send to the Borrower form HUD-90051, Sales Contract Review, no later than five business days from the Mortgagee’s receipt of an executed Contract for Sale.

(3) Net Sale Proceeds

(a) Definition Net Sale Proceeds are the proceeds of a PFS sale, calculated by subtracting reasonable and customary closing and settlement costs from the property sales price.

(b) Standard Regardless of the Property’s sale price, a Mortgagee may only approve a PFS Contract for Sale if the Tiered Net Sale Proceeds are at or above HUD’s minimum allowable thresholds. HUD’s requirements for minimum Tiered Net Sale Proceeds, as based on the length of time a Property has been competitively marketed for sale under an Approval to Participate, are as follows:

  • First 30 Days of marketing: The Mortgagee may only approve offers that will result in minimum Net Sale Proceeds of 88 percent of the “as-is” appraised FMV.
  • Next 30 Days of marketing: The Mortgagee may only approve offers that will result in minimum Net Sale Proceeds of 86 percent of the “as-is” appraised FMV.
  • For the remaining duration of the PFS marketing period: The Mortgagee may only approve offers that will result in minimum Net Sale Proceeds of 84 percent of the “as-is” appraised FMV.

The Mortgagee has the discretion to deny or delay sales where an offer may meet or exceed the 84 percent, if it is presumed that continued marketing would likely produce a higher sale amount.

The Mortgagee is liable for any FHA Insurance Claim Overpayment on a PFS transaction that closes with less than the required Tiered Net Sale Proceeds, unless a variance has been granted by HUD.

(c) Settlement Costs

(i) Allowable Settlement Costs The Mortgagee may include the following settlement costs in its Net Sale Proceeds calculation:

  • sales commission consistent with the prevailing rate but, not to exceed 6 percent;
  • real estate taxes prorated to the date of closing;
  • local/state transfer tax stamps and other closing costs customarily paid by the seller, including the seller’s costs for a Title Search and Owner’s Title Insurance;
  • compensation payable to the Owner-Occupant Borrower of $3,000, if not required to pay a cash contribution;
  • upon extinguishing the Owner-Occupant Borrower’s compensation of $3,000, HUD will allow an additional $1,500 of Net Sale Proceeds to be used to resolve junior liens, for a total of $4,500;
  • for Non-Occupant Borrowers, HUD will allow $1,500 of Net Sale Proceeds to be used to resolve junior liens;
  • the entire outstanding Partial Claim amount must be paid when calculating the Net Sale Proceeds. The seller, buyer, or other Interested Party may contribute the difference if the amount of Net Sale Proceeds falls below the allowable threshold; and
  • up to 1 percent of the buyer’s first mortgage amount if the sale includes FHA financing.

(ii) Unacceptable Settlement Costs The Mortgagee must not include the following costs in the Net Sale Proceeds calculation:

  • repair reimbursements or allowances;
  • home warranty fees;
  • discount points or mortgage fees for non FHA-financing;
  • Mortgagee’s Title Insurance fee; and
  • third-party fees incurred by the Mortgagee or Borrower to negotiate a PFS.

(d) Third-Party Fees With the exception of reasonable and customary real estate commissions, the Mortgagee must ensure that third-party fees incurred by the Mortgagee or Borrower to negotiate a PFS are not included on the Closing Disclosure or similar legal documents unless explicitly permitted by state law. The Mortgagee, its agents, or any outsourcing firm it employs must not charge any fee to the Borrower for participation in the PFS Program.

(e) Partial Claim The Mortgagee must ensure that all outstanding Partial Claims are paid in full. The Mortgagee must deduct any outstanding balance on a Partial Claim Note from the Net Sale Proceeds. The Mortgagee must send proceeds from the PFS sufficient to satisfy the Partial Claim directly to HUD’s Loan Servicing Contractor. If, after satisfying the Partial Claim, the Net Sale Proceeds fail to meet the applicable Tiered Net Sale Proceeds requirement, the Mortgagee must request and obtain approval from HUD via EVARS before closing.

(4) Title I Liens If the Mortgagee discovers that a Borrower has a HUD Title I Mortgage secured by the Property, the Mortgagee must contact the Title I subordinate lien holder to advise of the Borrower’s participation in a PFS. HUD may require the Mortgagee to negotiate the release of the lien in order to proceed with a PFS. If the Title I Mortgage has been assigned to HUD, the Mortgagee must contact HUD’s Financial Operations Center for guidance:

  • S. Department of Housing and Urban Development
    Financial Operations Center
    52 Corporate Circle
    Albany, New York 12203.
    1-800-669-5152/ fax (518) 862-2806

(5) Section 235 Recapture The Mortgagee must first determine if the Mortgage is subject to recapture as referenced in Section 235 Mortgages. If a recapture amount is owed to HUD, the Mortgagee must contact HUD’s Servicing Contractor prior to approving the PFS.

(K) Closing and Post-Closing Responsibilities Prior to closing, the Mortgagee must provide the Closing Agent with:

  • form HUD-90052, Closing Worksheet, which lists all amounts payable from Net Sale Proceeds; and
  • the PFS Addendum that was signed by:
    • buyers;
    • buyers’ agent;
    • sellers;
    • sellers’ agent (listing agent);
    • escrow closing agent; and
    • transaction facilitators/negotiators, if applicable.

The Mortgagee will receive from the Closing Agent a calculation of the actual Net Sale Proceeds and a copy of the Closing Disclosure or similar legal document.

(1) Mortgagee Review of Final Terms of PFS Transaction The Mortgagee must ensure that:

  • the final terms of the PFS transaction are consistent with the purchase contract;
  • only allowable settlement costs have been deducted from the seller’s proceeds;
  • the Net Sale Proceeds will be equal to or greater than the allowable thresholds;
  • form HUD-90052 is included in the Claim Review File; and
  • they report the PFS Sale to consumer reporting agencies.

(2) Closing Agent Responsibilities after Final Approval Once the Mortgagee gives final approval for the PFS and the settlement occurs, the Closing Agent must:

  • pay the expenses out of the Net Sale Proceeds and forward the Net Sale Proceeds to the Mortgagee;
  • forward a copy of the Closing Disclosure or similar legal document to the Mortgagee to be included in the Claim Review File no later than three business days after the PFS transaction closes; and
  • sign the PFS Addendum on or before the date the PFS transaction closes, unless explicitly prohibited by state statute.

(3) Satisfaction of Mortgage Debt Upon receipt of the portion of the Net Sale Proceeds designated for mortgage satisfaction, the Mortgagee must satisfy the Mortgage debt and may file a claim for mortgage insurance benefits.

(4) Discharge of Junior Liens The Mortgagee must provide for the discharge of junior liens as follows:

  • If the Borrower has the financial ability, the Borrower must be required to satisfy or obtain release of liens.
  • If the Owner-Occupant Borrower receives compensation ($3,000), this compensation may be applied towards discharging liens.
  • If no other sources are available, both the Owner-Occupant Borrower and the Non-Occupant Borrower may obligate up to an additional $1,500 from sale proceeds towards discharging liens or encumbrances.

(L) Early Termination of PFS Program Participation

(1) Standard

(a) Borrower-Initiated Termination The Mortgagee must permit a Borrower to voluntarily terminate participation in the PFS Program at any time.

(b) Mortgagee-Initiated Termination The Mortgagee may terminate a Borrower’s PFS Program participation at its discretion for any of the following reasons:

  • discovery of unresolvable title problems;
  • determination that the Borrower is not acting in good faith to market the Property;
  • significant change in property condition or value; or
  • re-evaluation based on new financial information provided by the Borrower that indicates that the case does not qualify for the PFS Option.

(c) Notification of PFS Program Participation Termination The Mortgagee must forward to the Borrower a date-stamped written explanation for terminating their program participation. This letter is to include the “end-of-participation” date for the Borrower.

(2) Required Documentation The Mortgagee must retain a copy of the Notification of PFS Program Participation Termination in the servicing file.

(M) Failure to Complete a PFS Transaction At the expiration of the PFS marketing period, should the Borrower be unable to complete a PFS transaction, the Mortgagee must re-evaluate available Loss Mitigation Options as follows:

  • determining eligibility for one of the Loss Mitigation Home Retention Options, if the Borrower’s financial condition has improved to the point that reinstatement is a viable option; and
  • trying to obtain a DIL of Foreclosure, if reinstatement is not feasible.

Within 90 Days after the expiration of the PFS marketing period, the Mortgagee must consider and approve the Borrower for an alternate Loss Mitigation Option or complete the first legal action to initiate foreclosure.

Should additional time be needed to complete a DIL or to initiate foreclosure, Mortgagees must submit a request for an extension of time to the NSC via EVARS.

(N) Extensions of Foreclosure Timeframe for PFS

(1) Standard After PFS early termination or option failure, HUD provides an automatic 90-Day extension to the deadline to complete a Loss Mitigation Option or to perform the first legal action initiating foreclosure. The automatic 90-Day extension begins the Day after the PFS Approval to Participate expires or is terminated. If the Mortgagee has not yet received the Net Sale Proceeds from the Closing Agent and the automatic 90-Day extension is nearing expiration, the Mortgagee must submit a request for extension to the NSC via EVARS.

(2) Required Documentation The Mortgagee must note the use of any extensions, whether automatic or requested, on form HUD-27011.

(O) Deficiency Judgments If a foreclosure occurs after the Borrower unsuccessfully participated in the PFS process in good faith, neither the Mortgagee nor HUD will pursue the Borrower for a deficiency Judgment.

(P) PFS Incentive The Mortgagee may claim an incentive for each completed PFS transaction that complies with all HUD PFS requirements.

(Q) Mortgage Insurance Termination The Mortgagee must not submit a mortgage insurance termination on PFS transactions. HUD can only pay FHA mortgage insurance benefits when the status of the mortgage insurance is “active.”

(R) Reporting of PFS The Mortgagee must report in SFDMS the appropriate Claim Termination of Insurance Code to indicate when the PFS has been held.

iii. Deed-in-Lieu of Foreclosure

(A) Definition A Deed-in-Lieu (DIL) of Foreclosure is a Loss Mitigation Home Disposition Option in which a Borrower voluntarily offers the deed as collateral Property to HUD in exchange for a release from all obligations under the Mortgage. There are three types of DIL transactions:

  • Streamlined DIL;
  • Streamlined DIL for Servicemembers with PCS Orders; and
  • Standard DIL.

(B) Eligibility

(1) Mortgage Status The Mortgagee must ensure that the Mortgage meets the following eligibility requirements for the DIL Option:

  • the Mortgage is in Default and the cause of Default must be incurable; or
  • the Borrower is at risk of Imminent Default and the Borrower provides to the Mortgagee documentation that supports their Imminent Default.

(2) Borrower Eligibility HUD expects Borrowers to first attempt to market the Property under the PFS Program prior to use of the DIL Option.

(a) Streamlined DIL

(i) Definition A Streamlined Deed-in-Lieu (DIL) is a DIL transaction for Owner-Occupant Borrowers and Non-Occupant Borrowers and does not require verification of hardship.

(ii) Streamlined DIL Standards The Mortgagee must ensure that the Borrowers:

  • meet the requirements for Streamlined PFS transactions; and
  • have attempted to complete a PFS transaction.

(iii) Eligible Properties The Mortgagee may offer the Streamlined DIL process for all Properties securing FHA-insured Mortgages, provided that all Borrowers meet all program requirements. Such Properties may be vacant, but cannot be condemned.

(b) Streamlined DIL for Servicemembers with PCS Orders

(i) Definition A Streamlined DIL for Servicemembers with PCS Orders Option is a Streamlined DIL that may be offered to servicemembers who must relocate to a new duty station at least 50 miles away from their existing residence, without the Mortgagee verifying hardship.

(ii) Streamlined DIL for Servicemembers with PCS Orders Standards The Mortgagee must ensure that servicemembers meet the requirements for a Streamlined PFS for Servicemembers with PCS Orders and have attempted to complete a PFS Option.

(iii) Eligible Properties The Mortgagee may offer the Streamlined DIL process for all Properties securing FHA-insured Mortgages, provided that all Borrowers meet all program requirements. Such Properties may be vacant, but cannot be condemned.

(c) Standard DIL

(i) Definition A Standard DIL is a DIL available for Owner-Occupant Borrowers who experienced a verifiable hardship that has affected their ability to sustain their Mortgage but who do not meet the requirements of a Streamlined DIL Option.

(ii) Standard DIL Standard Borrowers applying for the Standard DIL Option must provide verification of hardship and must submit a Complete Loss Mitigation Request for review. The Mortgagee must evaluate the Borrower’s financial information to determine whether the Borrower’s financial circumstances have changed to make them eligible for other Loss Mitigation Options.

(d) DIL Exceptions for Borrowers with More than One FHA-Insured Mortgage The Mortgagee must submit a request for NSC approval via EVARS for approval to offer a DIL Option to a Borrower who owns more than one FHA-insured Property.

(e) Exceptions for Non-Occupant Borrowers in Standard DIL Transactions HUD authorizes Mortgagees to offer Streamlined DIL to Non-Occupant Borrowers when the following can be demonstrated:

  • Need to vacate: the non-occupancy was related to the cause of Default; or
  • Not purchased/used as rental: the subject Property was not purchased as a rental or used as a rental for more than 18 months prior to the offering of the DIL Option.

The Mortgagee must submit a variance request to use the DIL Option to the NSC via EVARS when the Property is owned by a corporation or partnership.

(3) Condition of Title The Borrower or Mortgagee must be able to convey a clear and marketable title to the Secretary. The Mortgagee must obtain a title search or preliminary report verifying that the title is not impaired by:

  • unresolvable title problems; or
  • junior liens that cannot be discharged as permitted by HUD.

(4) Deficiency Judgment HUD will not accept a DIL when it has elected to pursue a deficiency Judgment against the Borrower.

(C) Disclosure Requirements for DIL Before approving a Borrower for a DIL, the Mortgagee must notify the Borrower in writing of the following:

  • The Mortgage must be in Default on the date the DIL special warranty deed is executed, pursuant to Section 204 of the National Housing Act (12 U.S.C. 1710).
  • DIL transactions are generally reported to consumer reporting agencies, and will likely affect the Borrower’s ability to obtain another Mortgage and other types of credit.
  • If the Borrower is a servicemember, it is recommended that the Borrower obtain guidance from their employer regarding the DIL’s impact on their security clearance and employment.
  • DIL transactions are generally reported to CAIVRS, which may result in the Borrower’s inability to obtain government financing or affect other government benefits for a certain period of time.

(D) Cash Reserve Contributions for Standard DIL Transactions

(1) Standard Prior to approving a Borrower to participate in a Standard DIL transaction, the Mortgagee must calculate and disclose to the Borrower the amount of the Borrower’s Cash Reserve contribution to be applied towards the Standard DIL transaction. HUD does not require Cash Reserve contributions for Streamlined DIL transactions. The Mortgagee must calculate the total Cash Reserves using the highest ending balance of each cash reserve asset.

(2) Cash Reserve Contribution Threshold The Cash Reserve contribution threshold is $5,000.

(3) Cash Reserves Greater than the Threshold The Mortgagee must require the Borrower with Cash Reserves greater than the contribution threshold to contribute 20 percent of the total amount exceeding the contribution threshold towards the mortgage debt. The Mortgagee must not require the Borrower to contribute more than the difference between the unpaid principal balance and the appraised value of the Property. If the appraisal used for the PFS program is no longer valid, the Mortgagee may use the most recently obtained appraisal for the purpose of calculating the Cash Reserve contribution.

(4) Cash Reserves At or Below the Threshold Amount If the Cash Reserve calculation returns an amount at or below the contribution threshold amount, or a negative amount, the Mortgagee is not required to obtain a contribution from the Borrower in connection with the DIL transaction.

(E) DIL Borrower Consideration

(1) Consideration Amount HUD offers Owner-Occupant Borrowers a consideration of up to $2,000 upon vacating the Property and satisfaction of the requirements of the DIL Agreement. HUD will not pay this consideration if the Property is occupied at conveyance.

(2) Use of Consideration Amount The Owner-Occupant Borrower may apply the entire amount of the consideration or a portion of it to resolve junior liens. The Owner-Occupant Borrower who is required to make a Cash Reserve contribution may only receive the amount necessary to satisfy junior liens, up to the consideration limit.

(F) DIL Agreement

(1) Standard The Borrower and the Mortgagee must execute a DIL Agreement in writing. HUD does not require a specific format for documenting a DIL Agreement. The Mortgagee must ensure that the DIL documentation is in compliance with all applicable laws and regulations.

(2) DIL Agreement Terms The Mortgagee must ensure that the DIL Agreement contains the following:

  • certification that the Borrower does not own other Property subject to a Mortgage insured by or held by HUD;
  • the Transfer Date;
  • notification of possible income tax consequences;
  • acknowledgement that Borrowers who comply with all requirements of the Agreement will not be pursued for deficiency Judgments;
  • a statement describing the physical condition in which the Property will be conveyed;
  • agreement with the Borrower to convey the Property vacant and free of Personal Property, unless HUD has approved an Occupied Conveyance;
  • itemization of keys, built-in-fixtures, and equipment to be delivered by the Mortgagee on or before the Transfer Date;
  • evidence that utilities, assessments, and HOA dues are paid in full by the Transfer Date, unless otherwise agreed to by all parties; and
  • the amount of consideration payable to and/or on behalf of the Borrower will not exceed $2,000.

(3) Required Documentation The Mortgagee must retain a copy of the executed DIL Agreement in the Claim Review File.

(G) DIL Conveyance to HUD

(1) Mortgage in Default The Mortgagee must ensure that the Mortgage is in Default when the DIL is recorded and the Property conveyed to HUD.

(2) Discharge of Junior Liens The Mortgagee must provide for the discharge of junior liens as follows:

  • The Mortgagee must complete a title search and must ensure that the secure release of junior liens and/or endorsements to the title policy are obtained.
  • HUD will not accept titles subject to most junior liens, including IRS liens. HUD will allow liens securing repayment of Section 235 assistance payments, Partial Claim advances, and Title I liens.
  • If the Owner-Occupant Borrower receives consideration, this consideration may be applied towards discharging liens.

(3) Special Warranty Deed The Borrower and the Mortgagee must convey the Property through a special warranty deed and, when possible, the Borrower must convey title directly to HUD. The Mortgagee must cancel and surrender to the Borrower the original credit instrument, indicating that the Mortgage has been satisfied. If it is necessary to convey title to the Mortgagee, and then to HUD, the Mortgagee must document the reason in the Claim Review File.

(4) Conveyance Timeframe The Mortgagee must record the special warranty deed and deliver the original, recorded deed to HUD’s MCM within 45 Days of the date the clear and marketable title was conveyed to the Secretary.

(5) Occupied Properties The Mortgagee must ensure that the Property is vacant at the time of conveyance. HUD will not accept a DIL if the collateral Property is occupied at the time of conveyance to HUD, unless authorized for Occupied Conveyance.

(6) Option Not to Convey The Mortgagee may elect not to convey title to HUD and to terminate the contract of mortgage insurance. If this occurs, the Mortgagee must use form HUD-27050-A in FHAC to notify HUD.

(H) DIL Compensation The Mortgagee may submit a claim for an incentive for each completed DIL transaction that complies with all HUD DIL requirements.

(I) Extensions for Foreclosure Timeframes The Mortgagee must complete the DIL or initiate foreclosure within six months of the date of Default as follows, unless the Mortgagee qualified for an automatic 90-Day extension by first attempting a Loss Mitigation Option or has received an extension approved by the NSC via EVARS:

  • If the DIL follows a failed SFB-Unemployment Agreement or PFS, the DIL must be completed or foreclosure initiated within 90 Days of the failure.
  • If the DIL follows any other Loss Mitigation Option, it must be completed or foreclosure initiated within six months of the date of Default.

(J) Reporting to Consumer Reporting Agencies and the IRS The Mortgagee must not report DIL transactions to consumer reporting agencies as foreclosures.

(K) Reporting of DIL The Mortgagee must report in SFDMS the appropriate Claim Termination of Insurance Code to indicate when the DIL was completed.