July 15, 2014
The FHA and HUD recently updated the rules for “non-home retention options” for borrowers at risk of going into default and/or foreclosure on FHA mortgage loans.
Two of those options are deed-in-lieu (DIL) of foreclosure and the pre-foreclosure sale (PFS). Under FHA loan rules, the borrower must be evaluated for eligibility for one or both of these options, as described in FHA Mortgagee Letter 2014-15:
“If none of FHA’s loss mitigation home retention options are available or appropriate, the mortgagee must evaluate the borrower for a non-home retention option. The priority order of FHA’s Loss Mitigation non-home retention options requires that a mortgagor in default or at imminent risk of default be evaluated for a PFS transaction before being evaluated for a DIL transaction. Therefore, the mortgagee must first determine a mortgagor’s eligibility for a PFS.”
There are two types of pre-foreclosure sales–one is a standard PFS, the other is known as a “streamline PFS”. “Standard” refers to an owner-occupied residence, “streamline” is the procedure used for non-owner occupied properties.
According to ML 2014-15, “A Standard PFS is only available to owner-occupants. In addition, to determine eligibility for a standard PFS1, a mortgagee must determine whether a mortgagor is experiencing a hardship by using a Deficit Income Test (DIT). The DIT is calculated by subtracting total monthly expenses from total monthly net income. The DIT is used to determine if a mortgagor is able to sustain his/her mortgage or if a mortgagor is experiencing a hardship that may qualify the mortgagor for a standard PFS.”
Furthermore, when the Deficit Income Test is administered, “A DIT yielding a negative amount would indicate that the mortgagor’s expenses exceed his/her income each month and, thus a PFS may be an appropriate loss mitigation tool if a loss mitigation home retention option is not viable.”
What circumstances could allow a borrower to be evaluated for a pre-foreclosure sale?
“Owner-occupant mortgagors may be considered for a standard PFS if they are current or less than 30 days past due on the mortgage obligation and can clearly demonstrate that they are at risk of imminent default due to one or more of the following hardships:
–A loss of or reduction in income that was supporting the mortgage loan;
–A change in household financial circumstances;
–Death of a co-mortgagor;
–Long-term/permanent illness or disability of a mortgagor or dependent family member;
–Divorce or legal separation of a mortgagor; or
–Distant employment transfer/relocation greater than 50 miles one-way from the mortgagor’s current primary residence to be closer to employment.”
For more information on whether your circumstances qualify for a standard pre-foreclosure sale, discuss your specific needs with your loan officer.
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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