THE FHA SHORT SALE PROCESS EXPLAINED!
What is the FHA Short Sale Process?
All FHA mortgages are insured by HUD. HUD has their own short sale process known as the FHA PFS (Pre-Foreclosure Sale) program. HUD requires the lenders processing short sales on FHA loans follow FHA short sale guidelines.
The FHA PFS Program was originally introduced to help homeowners in default with FHA mortgages avoid foreclosure and free them of their mortgage obligation, when a sale of the property would not produce adequate proceeds to pay off the loan. The FHA PFS Program is a predictable program and applies to every FHA loan. When sellers complete the program successfully, their FHA mortgage debts are fully forgiven, and they may even receive a relocation incentive.
As there are no proceeds to the sellers in a short sale, all closing costs including commissions are paid out of proceeds, making FHA short sales a no cost solution for most homeowners.
FHA short sales go through the same basic steps as all short sales with some limited variations.
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Many FHA short sales result from failed loan modifications, or excessive debts from partial claims. In recent years over a million HUD partial claims have been written as part of COVID 19 recovery efforts, leaving many homeowners upside down and unable to sell their homes for the balance of their mortgage and partial claim.
HUD partial claims (usually resulting from prior loan modifications or forbearances) are also settled in the FHA PFS (short sale) process.
The difference from a standard short sale with a junior lien, is that with FHA and HUD Partial Claims, the first mortgage takes the loss with the partial claim always being paid in full. If the HUD partial claim cannot be paid in full a short sale cannot be completed.
In an FHA Short Sale (PFS) the Borrower will be required to:
- Maintain the property in “ready to show” condition, make basic property repairs,and perform all normal property maintenance activities (e.g., interior cleaning, lawn maintenance, etc.).
- The Borrower must report all damage and/or repair expenses resulting from fire, flood, or other natural causes immediately to the insurance company and Mortgagee.
There are two types of FHA PFS programs. The Standard PFS is for owner occupants and non-owner occupants, and the other Streamlined PFS is for Servicemembers:
A Standard PFS Option is available for Owner-Occupant and Non-Occupant Borrowers and does not require verification of hardship.
Standard PFS Standards:
- The Borrower indicates a Financial Hardship affecting their ability to sustain the Mortgage.
- The Borrower must be 61 Days or more Delinquent on the FHA insured Mortgage as of the date of the Mortgagee’s approval.
- The Borrower must have exhausted or been deemed ineligible for all permanent Loss Mitigation Home Retention Options.
A Streamlined PFS for Servicemembers may be offered to servicemembers with PCS Orders.
Streamlined PFS for Servicemembers with PCS Orders Standards:
- 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 no new permanent housing has been or will be obtained as a result of the orders.
- On the date the PFS closing occurs, the Mortgagee must ensure that the Mortgage is in Default status (minimum 31 Days Delinquent).
Per FHA short sale guidelines, once a homeowner is approved into the program, their lender will order an appraisal of the home, and then issue an ATP (Approval To Participate) in the PFS program.
The ATP is valid for 120 days, during which a sale meeting the terms of the letter will be approved. During this time any foreclosure activity will be postponed so that the owner can proceed to sell the property.
Once a sale meeting the terms specified on the ATP is approved, an approval letter naming the buyer will be produced and the sale can close as any other, with qualifying owner occupants even receiving $3,000 relocation assistance at closing, and sellers receiving full forgiveness of their excess mortgage debts.
Did I mention FHA can be strict? Getting through a short sale with FHA is predictable…but you have to follow their rules!
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I was about to give up and just turn my back on my home and walk away. However, I found Minna and she was a lifesaver! Other realtors tried to help me but made the situation worse and wasted my time. If you are in the unfortunate place of having to short sale your home, then you know it can be embarrassing and difficult, especially if you don't have real estate experience. Minna knew exactly what to do, and was very professional, knowledgeable, and, kind. Minna was on my side and handled all the challenges we faced with selling a house that at times seemed like it didn't want to be sold! I appreciate Minna and know that you will love her.
Kelly
Short Seller
Last Updated on February 2, 2026 by Minna Reid
