Pre-Foreclosure Sale
Frequently Asked Questions

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 (unpaid principal balance, plus delinquent interest).

If the result is 63% or higher, that criterion has been met. If a Partial Claim subordinate lien exists, the Partial Claim payoff amount must be added to the outstanding indebtedness to properly calculate the 63% ratio.

Answer: To arrive at the 82% ratio:

    Contract sales price minus (allowable PFS expenses + Partial Claim junior lien amount)(if applicable) divided by as-is appraised value = Net Sales Proceeds. Net Sales Proceeds result must equal or be greater than 82%.

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: Form HUD-90038 Certification allows for the homeownership counseling be provided by a HUD approved housing counseling agency, mortgagee, or from a HUD staff member. Therefore, as the mortgagee, you can facilitate this counseling to the uncooperative mortgagor and pursue their signature on above HUD form, as participants in the PFS procedure must sign a certification that he or she has received homeownership counseling before a proposed PFS transaction can be approved. Participant is interpreted as all mortgagors of record.

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: If the property is in pre-foreclosure, how do I buy before foreclosure?

Answer: When a property is in pre-foreclosure (NOD), the owner still has a chance to stop the foreclosure process by paying off what is owed or by selling the property. The pre-foreclosure period can last several months, so you may need to be patient when trying to contact the owner in default.

Question 10: How can I buy an auction property?

Answer: After a property owner misses several mortgage payments, the owner has a pre-foreclosure grace period of a few weeks to a few months -- depending on the state -- to bring the payments up to date and stop any foreclosure proceedings. If the owner does not bring the delinquent payments up to date during the pre-foreclosure period, the property will be sold at a public auction.

Question 11: How do I buy bank-owned REO properties?

Answer: The lender/bank has taken ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction. The lender usually sells the property to recover the unpaid loan amount. The lender typically clears the title for any buyer, but the potential bargain is often less than a pre-foreclosure or auction property.

Question 12: How do I buy property I see posted on this website?

Answer: How you go about buying a property depends on the property status. If the property is For Sale By Owner or a Resale Home, you would approach the owner or the listing agent to make an offer. If the property is in foreclosure, the process of buying will differ from the typical real estate purchase.

Question 13: How do I contact the lender to buy a bank-owned property (REO)?

Answer: If the property is Bank Owned (REO), your first step is to contact the bank, called the lender on the Property Details page. The lender now owns the property. You should ask for the lender's REO department or bank-owned property department to proceed with possibly buying the property.

Question 14: How do I check property liens, value and equity?

Answer: Additional liens against a property (these can include delinquent taxes) can be researched several ways. It's important to research liens before you buy a property, whether the property is a foreclosure or not, because you as the buyer may be responsible for paying off those liens.

Question 15: What are foreclosures and how do I learn more about buying foreclosures?

Answer: Foreclosure is a legal process that allows a lender/bank to sell or take possession of a property due to non-payment of a loan that is secured by that property. Buyers have three opportunities to purchase property during foreclosure.

Question 16: How do I find the market value for a home?

Answer: If you work with a real estate agent (which is recommended for first-time foreclosure buyers), the agent can provide professional advice on the value of the property and how much you should offer. Contact an Agent to find a local real estate agent who can help you buy a property.