Lenders have many options besides foreclosure for struggling borrowers. Mortgage lenders that participate in the Federal Housing Administration's mortgage insurance programs can offer borrowers the chance to short sell their home. A short sale involves selling for less than the amount owed on the loan. If approved, the sale proceeds satisfy the debt and the FHA lender releases you from the mortgage obligation.
The FHA backs low down-payment loans made by approved lenders. The government agency agrees to reimburse lender losses in the event of a short sale or other forms of borrower default. Generally, FHA loans are intended for borrowers with credit challenges and minimal assets. When considering a short sale due to financial hardship, you must contact your lender or the servicing company that handles your mortgage payments, to ask whether you meet the FHA's short sale guidelines.
FHA lenders follow certain criteria to determine financial hardship for a short sale. Acceptable hardships involve life events beyond your control which cause a reduction of income or increase in expenses that prevent you from making regular payments for the foreseeable future. Examples of permanent financial hardship include: job loss or pay cut, divorce or legal separation, medical emergency, disability or death of a wage earner or family member which affects the household finances. The lender requires a written explanation and supporting documentation of financial hardships to approve a short sale.
FHA loans are intended for owner-occupant borrowers. To short sell, you must previously have used the home as your primary residence and had to move out due to financial hardship or have rented the home out for more than 18 months. The lender must also prescreen you for other alternatives, such as a refinance, loan modification or forbearance, before offering you a short sale. Borrowers who do not meet those guidelines have no chance of repaying the FHA loan, so the lender may prefer that you sell the home to avoid the hassle and expense of foreclosure.
FHA loans that are at least 31 days past due may qualify for short sale. In addition to listing your home with a real estate brokerage, the home must be on the market for at least four months before the lender can approve the sale. You have six months from the short sale approval date to close and must be able to transfer a clear title. Your real estate agent handles negotiations and paperwork directly with your lender. If you have another lien on the property with a non-FHA mortgage lender, you must negotiate a short sale with them, too. The FHA lender requires an appraisal of your home to determine its fair market value. The offer you, and ultimately the lender, accept must meet this value.
- Digital Vision./Digital Vision/Getty Images