The Preforeclosure Sale (PFS) Program allows the defaulted Borrower to sell his/her home and use the Net Sale Proceeds to satisfy the mortgage debt even though the Proceeds are less than the amount owed.
NOTE: NSC and Post Claims Division have developed a listing of PFS Allowable and Disallowable fees. If the fee the Lender wants to verify is not on the list, the Lender will need to submit a Variance via HUD's Extension and Variance Automated Requests System (EVARS).
Question 1: May a buyer or seller receive cash at a PFS closing?
Answer: No. The HUD-1 Settlement Sheet is to be completely filled out, providing both the buyer's and seller's costs and fees. Neither the buyer nor seller is to receive cash at closing. The seller, if applicable, may be eligible for the Seller Incentive, but this Incentive is to be reflected on the HUD-1 as a disbursement or credit to the seller, rather than cash. ML 2014-15 and 2008-43.
Question 2: What are the minimum Net Sales Proceeds requirements for Preforeclosure Sales?
Answer: The borrower must be willing to actively market his/her property for at least three months.
- For the first 30 days of marketing, lenders may only approve offers that will result in minimum Net Sale Proceeds of 88% of the as-is appraised Fair Market Value (FMV).
- During the next 30 days of marketing, lenders may only approve offers that will result in minimum Net Sale Proceeds of 86% of the as-is appraised FMV.
- For the duration of the marketing period, lenders may only approve offers that will result in minimum Net Sale Proceeds of 84% of the as-is appraised FMV.
See ML 2008-43.
Question 3: The borrower is deceased and his father has been making the monthly mortgage payments. May the father acquire the property under the PFS Program?
Answer: No. Preforeclosure sales must be between two unrelated parties and be characterized by a selling price and other conditions that would prevail in a typical real estate sales transaction. Any conflict of interest, appearance of a conflict, or self-dealing by any of the parties to a transaction (borrower, lender, appraiser, purchaser, etc.) is strictly prohibited. See ML 2014-15.
Question 4: A lender is the holder of both the first and second mortgages. When completing a Preforeclosure Sale, may the lender utilize the $1,500 that is available to pay towards the settlement of its second mortgage?
Answer: Yes, when completing a Preforeclosure sale, the lender may utilizie the $1,500 consideration that is available to pay towards the settlement of its second mortgate. Additionally, qualifying owner-occupant mortgagors may apply the $3,000 consideration to resolve junior liens. See ML 2008-43 and 2014-15.
Question 5: May a lender offer a PFS after a Partial Claim has been completed?
Answer: Yes. A PFS may follow a Partial Claim if there is a new reason for default and if the borrower lacks the financial ability to cure this present default. The Partial Claim amount must be added to the Unpaid Principal Balance and the Accrued Interest amount to correctly calculate total outstanding mortgage indebtedness. See ML 2008-43.
Question 6: Is it the responsibility of the Lender to acquire marketable title?
Answer: Yes. All properties sold under the PFS Program must have marketable title. See ML 2008-43.