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j. Home Disposition Options (11/10/2026)
i. Standard
The Mortgagee must review Borrowers for Home Disposition Options who are unable to sustain the Mortgage with the assistance of a Loss Mitigation Home Retention Option.
The Home Disposition Options include:
• Pre-Foreclosure Sale (PFS); and
• Deed-in-Lieu (DIL).
The Mortgagee must notify the Borrower that they may be able to avoid foreclosure by selling their home with a traditional sale or a PFS Option.
If the Borrower advises that their financial situation has improved during the PFS or DIL process and wants to retain the Property, the Mortgagee must review the Borrower for one additional Loss Mitigation Home Retention Option.
ii. Pre-Foreclosure Sales
(A) Definition
A Pre-Foreclosure Sale (PFS), also known as a Short Sale, refers to the sale of real estate that generates proceeds that are less than the amount owed on the Property and in which the lien holders agree to release their liens and forgive the deficiency balance on the real estate. There are two PFS Options:
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• Standard PFS; and
• PFS for Servicemembers.
(B) Requirements for all PFS Options
(1) PFS Outreach Requirements
(a) Form HUD-90035, Information Sheet: Pre-foreclosure Sale Procedure
When the Mortgagee has identified a Borrower as a qualified candidate for a PFS or a Borrower has expressed an interest in participating, the Mortgagee must provide to the Borrower, electronically or by mail, form HUD-90035, Information Sheet: Pre-foreclosure Sale Procedure, adding its toll-free or collect telephone number to the form.
(b) Disclosure Requirements for PFS Transactions
Prior to approving the Borrower for the PFS Option, the Mortgagee must notify the Borrower of the following in writing:
• The Mortgage must be three or more full monthly payment due and unpaid (61 Days or more past due) on the date the Mortgagee approves the Borrower’s participation in a Standard PFS.
• On the date the PFS for Servicemembers transaction closes, the Mortgage must be in Default status (minimum 31 Days Delinquent).
• Until the PFS transaction has closed, the Borrower must 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.).
o 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.
• PFS transactions are reported to consumer reporting agencies and will likely affect the Borrower’s ability to obtain another Mortgage and other types of credit.
• If the Borrower is a servicemember, it is recommended that the Borrower obtain guidance from their employer regarding the PFS’s impact on their security clearance and employment.
Where the Property is encumbered with a PACE obligation, the property sales contract must indicate whether the obligation will remain with the Property or be satisfied by the seller at, or prior to closing. Where the obligation will remain, all terms and conditions of the PACE obligation must be fully disclosed to the buyer in accordance with applicable law (state and local) and made part of the sales contract.
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(2) Required Documentation for PFS
The Mortgagee must maintain all required documentation in the Servicing File and the Claim File.
(C) PFS Options
(1) Standard PFS
(a) Definition
A Standard PFS Option is available for Owner-Occupant and Non-Occupant Borrowers and does not require verification of hardship.
(b) Standard
The Mortgagee must ensure that the Owner-Occupant or Non-Occupant Borrower meet the following requirements:
• 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; and
• the Borrower must have exhausted or been deemed ineligible for all permanent Loss Mitigation Home Retention Options.
(c) Corporations or Partnerships Requesting PFS Option
The Mortgagee must submit a variance request for HUD approval via EVARS to use the PFS Option when the Property is owned by a corporation or partnership.
(2) PFS for Servicemembers
(a) Definition
A Streamlined PFS for Servicemembers is a Streamlined PFS that may be offered to servicemembers with PCS orders who must relocate to a new duty station at least 50 miles away from their existing residence.
(b) Standard
The Mortgagee must ensure that servicemembers meet the following requirements for a PFS for Servicemembers:
• 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:
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o the Property securing the FHA-insured Mortgage is or was their
Principal Residence when the PCS orders were issued; and
o 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).
(D) Property Valuation
(1) Appraisals
(a) Standard
The Mortgagee must obtain a standard electronically-formatted appraisal performed by an FHA Roster Appraiser pursuant to the following requirements:
• the appraisal must contain an “As-Is” Fair Market Value (FMV) for the subject Property and must be completed in accordance with the Pre- Foreclosure Sale Program requirements in the Appraiser and Property Requirements for Title II Forward and Reverse Mortgages section; and
• a copy of the appraisal must be provided to the homeowner, sales agent, or HUD, upon request.
(b) Required Analysis and Reporting of a Property Assessed Clean
Energy Obligation
The Appraiser must review the sales contract, if applicable, and property tax records for the Property to determine the amount outstanding and the terms of the Property Assessed Clean Energy (PACE) obligation:
• if the Mortgagee notifies the Appraiser that the subject Property will remain subject to a PACE obligation;
• when the Appraiser observes that the property taxes for the subject Property are higher than average for the neighborhood and type of dwelling; or
• when the Appraiser observes energy-related building components or equipment or is aware of other PACE-allowed improvements during the inspection process.
The Appraiser must report the outstanding amount of the PACE obligation for the subject Property and provide a brief explanation of the terms.
Where energy and other PACE-allowed improvements have been made to the Property through a PACE program, and the PACE obligation will remain outstanding, the Appraiser must analyze and report the impact on value of the
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Property, whether positive or negative, of the PACE-related improvements and any additional obligation (i.e., the PACE special assessment).
(c) Appraisal Validity Period
The as-is appraisal used for a PFS transaction is valid for 180 Days from the effective date of the appraisal report.
If a Mortgagee determines that a subsequent as-is appraisal is required, the Mortgagee may obtain a new as-is appraisal, even if the Property was appraised by an FHA Roster Appraiser within the preceding 180 Days. If a third or any subsequent appraisal is required, the Mortgagee must submit a variance request for HUD approval via EVARS.
(d) Required Documentation
The Mortgagee must retain a copy of the appraisal in the Servicing File and the Claim File.
(2) Validation of Appraised Value
(a) Standard
Prior to authorizing the marketing of the Property, the Mortgagee must review the appraisal to determine if further HUD approval is required to proceed with the as-is appraised value of the Property, as determined by the appraisal performed by an FHA Roster Appraiser.
The Mortgagee must obtain a Broker’s Price Opinion (BPO) or Automated Valuation Model (AVM) if the as-is appraised value of the Property is:
• less than the unpaid principal balance by an amount of $75,000 or greater; or
• less than 50 percent of the unpaid principal balance.
If a BPO or AVM is required, the Mortgagee must submit a variance request for HUD approval via EVARS, before proceeding with the PFS using the as-is appraised value.
If a BPO or AVM is not required, the Mortgagee is not required to submit a request for a variance through EVARS.
(b) Requirements for Variance Request for Property Valuation
When required to submit a variance request to validate the as-is appraised value via EVARS, the Mortgagee must:
• note on the variance request the specific reason for the request; and
• upload the following attachments:
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o the as-is appraisal;
o the BPO or AVM; and
o any additional supporting documents needed for HUD review, if
applicable.
The Mortgagee must obtain approval before authorizing the marketing of the Property.
(c) Required Documentation
The Mortgagee must retain in the Claim File a copy of the BPO or AVM and the approved variance, if required.
(3) List Price
The Mortgagee must ensure that the Borrower lists the Property for sale at no less than the “As-Is” value as determined by an appraisal completed in accordance with the requirements in Pre-Foreclosure Sale Program.
(E) Property Condition
A Property that is condemned or that the Mortgagee determined is abandoned is not eligible for PFS.
(1) Surchargeable Damage
(a) Definition
Surchargeable Damage is damage to a Property caused by fire, flood, earthquake, tornado, hurricane, boiler explosion (for condominiums only), or Mortgagee Neglect.
(b) Standard
The Mortgagee is responsible for the cost of Surchargeable Damage.
(c) PFS Request for Damaged Property
The Mortgagee must submit a variance request for HUD approval via EVARS before approving the use of the PFS Option for a Property with Surchargeable Damage as follows:
• The Mortgagee must first obtain the Government’s Estimate of the Cost to Repair the Surchargeable Damage by contacting HUD’s Mortgagee Compliance Manager (MCM).
• Upon receipt of the Government’s Estimate of the Cost to Repair, the Mortgagee must submit a variance request via EVARS to obtain HUD approval prior to entering into a PFS Agreement with the Borrower.
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The Mortgagee must note on the variance request the specific reason for the request and attach any supporting documents needed for HUD’s review.
(d) “As-Is” Subject to Surchargeable Damage
If the Property is being sold “As-Is” subject to the Surchargeable Damage, the Mortgagee must deduct the Government’s Repair Cost Estimate of the damage from its PFS Claim.
(e) “As Repaired” Subject to Surchargeable Damage
If the Property is being sold “As Repaired” and funds for Surchargeable Damage repairs are escrowed or provided as a credit to the Borrower at closing, the Mortgagee must not include in its Net Sale Proceeds calculation the amount of the repair escrow or repair credit.
(2) Damage other than Surchargeable Damage
If the damage is not considered Surchargeable Damage, the Mortgagee is not required to obtain HUD approval prior to approving the PFS Agreement.
(3) Hazard Insurance Claim
Where applicable, the Mortgagee must work with the Borrower to file a hazard insurance claim and either:
• use the proceeds to repair the Property; or
• adjust the PFS Claim by the amount of the insurance settlement (Non- Surchargeable Damage) or the Government’s Repair Cost Estimate.
(4) Disclosure of Damage after PFS Approval
In the event the Mortgagee becomes aware that the Property has sustained significant damage after a Borrower has received the Approval to Participate
(ATP) in the PFS Program, the Mortgagee must re-evaluate the Property to determine if it continues to qualify for the PFS Program or terminate participation if the extent of the damage changes the Property’s FMV.
(F) Condition of Title
The Mortgagee must ensure that all FHA-insured mortgaged Properties sold under the PFS Program have marketable title.
Before approving a Borrower for participation in the PFS Program, the Mortgagee must obtain a title search or preliminary report and determine whether the title is impaired by:
• unresolvable title problems;
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• liens that cannot be discharged as permitted by HUD; or
• a PACE obligation.
(G) Owner-Occupant Borrower Compensation
(1) Compensation Amount
HUD offers Owner-Occupant Borrowers who act in good faith and successfully sell their Properties using the PFS Option a compensation of up to $3,000.
(2) Use of Compensation
The Owner-Occupant Borrower may:
• apply the entire amount of the $3,000 compensation or a portion of it to resolve liens, including a PACE obligation;
• offset the sales transaction costs not paid by HUD (including a home warranty plan fee, costs of optional repairs, and the buyer’s closing expenses); and/or
• use the compensation for relocation or transition assistance.
The Mortgagee must instruct the Closing Agent to:
• pay the HUD relocation or transition assistance from Net Sale Proceeds; and
• itemize on the Closing Disclosure or similar legal document any relocation or transition assistance received by HUD or from other entities.
(3) Required Documentation
The Mortgagee must ensure that the Closing Disclosure or similar legal document accurately reflects the use of any Borrower compensation amount.
(H) PFS Program Participation Requirements
(1) Approval to Participate
(a) Definition
A Pre-Foreclosure Sale (PFS) Approval to Participate (ATP) is an agreement signed by the Borrower to confirm their willingness to comply with the PFS Program requirements.
(b) Standard
After determining that a Borrower and Property meet the PFS eligibility requirements, the Mortgagee must notify the Borrower by sending:
• an ATP for the PFS Program (form HUD-90045, Approval to Participate: Pre-foreclosure Sale Procedure Property Sales
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Information Property Occupancy & Maintenance), including the date by which the Borrower’s Sales Contract must be executed under Pre- Foreclosure Sale Marketing Period guidance; and
• a Pre-Foreclosure Sale Addendum.
The Mortgagee must send these documents to the Borrower via methods providing confirmation or a timestamp of delivery.
The Mortgagee must receive the signed ATP within 10 Days of the date of delivery of the ATP.
(2) Use of Licensed Real Estate Broker
(a) Borrower Retention of Licensed Real Estate Broker
The Borrower is responsible for retaining the services of a licensed real estate broker/agent within seven Days of the date of delivery of the ATP.
(b) Required Listing Disclosure
The Mortgagee must ensure that the established Listing Agreement between the seller and the agent/broker includes the following cancellation clause: “Seller may cancel this Agreement prior to the ending date of the listing period without advance notice to the agent/broker, and without payment of a commission or any other consideration if the property is conveyed to the mortgage insurer or the mortgage holder. The sale completion is subject to approval by the mortgagee.”
(c) Real Estate Broker Duties
The real estate broker/agent must market the Property within the preestablished time frame stated in the ATP and list the Property in accordance with the property valuation requirements.
(d) Real Estate Broker Conflicts of Interest
The real estate broker/agent selected must have no conflict of interest with the Borrower, the Mortgagee, the Appraiser or the buyer associated with the PFS transaction. The broker/agent must not claim a sales commission on a PFS of a broker’s/agent’s own Property or that of a spouse, sibling, parent, or child.
Any conflict of interest, appearance of a conflict, or self-dealing by any of the parties to the transaction is strictly prohibited.
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(3) Arm’s Length PFS Transaction
(a) Definition
An Arm’s Length PFS Transaction is between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment and without hidden terms or special understandings existing between any of the parties involved in the transaction.
(b) Standard
The Mortgagee must ensure that the following arm’s length requirements apply to parties involved in PFS transactions:
• Any PFS proposed by the Borrower or their agent and approved by the Mortgagee must be an Arm’s Length Transaction between the Borrower and prospective buyer, subject to the exceptions in the Permitted Non-Arm’s Length Transactions section.
• Except for real estate agents and brokers representing a party to the PFS, no party that is a signatory on the sales contract, including addenda, can serve in more than one capacity.
• The broker hired to sell the Property must not share a business interest with the Mortgagee.
• If the Mortgagee knows that a shared interest exists between the Appraiser and sales agent, the Mortgagee must note this in the Servicing File and the Claim File.
(c) Permitted Non-Arm’s Length Transactions
HUD permits non-Arm’s Length PFS Transactions, to the extent necessary to comply with state law, where state law prohibits placement of an Arm’s Length Transaction requirement on property sales.
If clauses (a) and (c) of the PFS Addendum are impermissible under state law, the Mortgagee may strike these clauses from the PFS Addendum prior to execution, provided that the transaction complies with all PFS Program requirements.
(d) Relocation Service Contribution
The Mortgagee may permit a relocation service affiliated with the Borrower’s employer to contribute a fixed sum toward the proceeds of the PFS transaction without altering the arm’s length nature of the sale, as long as the result is an outright sale of the Property and cancellation of the FHA mortgage insurance.
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(4) Mortgagee Monitoring of PFS
The Mortgagee must monitor the PFS to ensure the Borrower’s compliance with the terms in the ATP and with all PFS Program requirements.
The Mortgagee must terminate a Borrower’s participation in the PFS Program in the event of noncompliance.
(I) Pre-Foreclosure Sale Marketing Period
(1) Maximum Marketing Period
The Borrower has four months from the date of the Borrower’s ATP to acquire a contract of sale.
(2) Minimum Marketing Period
The Mortgagee must ensure that PFS Properties are listed in the Multiple Listing Service (MLS) for a minimum of 15 Days before offers are evaluated. After this initial listing period, the broker/agent may evaluate offers as they are received.
This 15-Day minimum marketing period must follow the date of the Borrower’s ATP.
(3) Extension to PFS Marketing Period
HUD provides an automatic two-month extension to the deadline to initiate foreclosure for completion of a PFS transaction if there is a signed contract of sale, but settlement has not occurred by the end of the fourth month following the date of the Borrower’s ATP in the PFS Program.
(4) Monthly Review of Marketing Status
On a monthly basis, Mortgagees must review the Property’s marketing status with the Borrower and/or real estate broker/agent.
(5) Property Inspection
The Mortgagee must inspect Properties during the PFS period if:
• the Property is vacant;
• the Mortgagee has reason to suspect that the Property has become vacant; or
• the Borrower or Authorized Third Party has not maintained contact with the Mortgagee.
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(6) Previously Initiated Foreclosures
The Mortgagee may not initiate a four-month PFS marketing period for a Property after the first legal action to initiate foreclosure has occurred.
If the Mortgagee has received an acceptable contract of sale that meets the PFS requirements, the PFS marketing period must only be issued for the time needed to close based on the close of escrow date on the contract of sale.
The Mortgagee may only cancel or temporarily suspend the foreclosure action where such suspension is permissible under state law.
(J) Evaluation of Offers
(1) Standard
The listing real estate broker/agent must provide the Mortgagee with an offer that:
• yields the highest net return to HUD; and
• meets HUD’s requirements for an acceptable contract of sale.
The listing real estate broker/agent must ensure that:
• all offers submitted to the Mortgagee for approval are signed by both the seller and the buyer prior to submission; and
• the PFS Addendum is signed by all the applicable parties (except for the Closing Agent).
(2) Back-up Offers
Once an offer has been submitted to the Mortgagee for approval, the listing real estate broker/agent must retain any offer that the seller elects to hold for “back- up” until a determination has been made on the previously submitted offer.
(3) Required Documentation
The listing real estate broker/agent must retain all offers received, including offers not submitted for approval, in accordance with state law.
(K) Contract Approval by Mortgagee
(1) Standard
In reviewing the contract of sale, the Mortgagee must:
• ensure that the PFS sale is an outright sale of the Property and not a sale by assumption;
• review the sales documentation to determine there are:
o no hidden terms or special agreements existing between any of the
parties involved in the PFS transaction; and
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o no contingencies that might delay or jeopardize a timely settlement;
and
• determine that the Property was marketed pursuant to HUD requirements and that the minimum required Tiered Net Sale Proceeds have been met.
The following anti-fraud measures apply to PFS transactions:
• A Mortgagee must not approve a Borrower for a PFS if the Mortgagee knows or has reason to know of a Borrower’s fraud or misrepresentation of information.
• All parties involved in a PFS transaction must sign and date a PFS Addendum as a contingency for a PFS transaction to close.
(2) Sales Contract Review Period
After receiving an executed contract of sale for a Borrower approved to participate in the PFS Program, the Mortgagee must send to the Borrower form HUD-90051, Sales Contract Review: Pre-foreclosure Sale Procedure, no later than five business days from the Mortgagee’s receipt of an executed contract for sale.
(3) Net Sale Proceeds
(a) Definition
Net Sale Proceeds are the proceeds of a PFS sale, calculated by subtracting reasonable and customary closing and settlement costs and any outstanding balances on Partial Claim(s) or Payment Supplement(s) from the property sales price.
(b) Standard
Regardless of the Property’s sale price, a Mortgagee may only approve a PFS contract for sale if the Tiered Net Sale Proceeds are at or above HUD’s minimum allowable thresholds. HUD’s requirements for minimum Tiered Net Sale Proceeds are based on the length of time the Property has been competitively marketed for sale under an ATP as follows:
• Days 1-30 of marketing: The Mortgagee may only approve offers that will result in minimum Net Sale Proceeds of 88 percent of the “As-Is” appraised FMV.
• Days 31-60 of marketing: The Mortgagee may only approve offers that will result in minimum Net Sale Proceeds of 86 percent of the “As-Is” appraised FMV.
• Days 61-120 of marketing: The Mortgagee may only approve offers that will result in minimum Net Sale Proceeds of 84 percent of the “As-Is” appraised FMV.
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The Mortgagee has the discretion to deny or delay sales where an offer may meet or exceed the Net Sale Proceeds of 84 percent, if it is presumed that continued marketing would likely produce a higher sale amount.
The Mortgagee is liable for any FHA Insurance Claim Overpayment on a PFS transaction that closes with less than the required Tiered Net Sale Proceeds, unless a variance has been granted by HUD.
(c) Settlement Costs
(i) Allowable Settlement Costs
The Mortgagee may include the following settlement costs in its Net Sale Proceeds calculation:
• sales commission consistent with the prevailing rate but, not to exceed 6 percent;
• real estate taxes pro-rated to the date of closing;
• local/state transfer tax stamps and other closing costs customarily paid by the seller, including the seller’s costs for a title search and Owner’s Title Insurance;
• compensation payable to the Owner-Occupant Borrower of $3,000, or to be used to resolve junior liens;
• for Non-Occupant Borrowers, HUD will allow $1,500 of Net Sale Proceeds to be used to resolve junior liens;
• the entire outstanding Partial Claim amount must be paid when calculating the Net Sale Proceeds. The seller, buyer, or other Interested Party may contribute the difference if the amount of Net Sale Proceeds falls below the allowable threshold; and
• up to 1 percent of the buyer’s first mortgage amount if the sale includes FHA financing.
(ii) Unacceptable Settlement Costs
The Mortgagee must not include the following costs in the Net Sale Proceeds calculation:
• repair reimbursements or allowances;
• home warranty fees;
• Discount Points or mortgage fees for non FHA-financing;
• Mortgagee’s Title Insurance fee; and
• Third-Party Fees incurred by the Mortgagee or Borrower to negotiate a PFS.
(d) Third-Party Fees
With the exception of reasonable and customary real estate commissions, the Mortgagee must ensure that third-party fees incurred by the Mortgagee or
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Borrower to negotiate a PFS are not included on the Closing Disclosure or similar legal documents unless explicitly permitted by state law.
The Mortgagee, its agents, or any outsourcing firm it employs must not charge any fee to the Borrower for participation in the PFS Program.
(e) Partial Claim and Payment Supplement Subordinate Mortgages
The Mortgagee must ensure that all outstanding Partial Claims and Payment Supplements are paid in full.
The Mortgagee must deduct any outstanding balances on Partial Claim and Payment Supplement Subordinate Mortgages from the Net Sale Proceeds. The Mortgagee must ensure sufficient proceeds from the PFS satisfy all Partial Claim and Payment Supplement balances, and the funds are remitted directly to HUD’s Loan Servicing Contractor.
If, after satisfying the Partial Claim or Payment Supplement, the Net Sale Proceeds fail to meet the applicable Tiered Net Sale Proceeds requirement, the Mortgagee must request and obtain approval from HUD via EVARS before closing.
(4) Title I Liens
If the Mortgagee discovers that a Borrower has a HUD Title I Mortgage secured by the Property, the Mortgagee must contact the Title I subordinate lien holder to advise the Borrower’s participation in a PFS. HUD may require the Mortgagee to negotiate the release of the lien in order to proceed with a PFS.
If the Title I Mortgage has been assigned to HUD, the Mortgagee must contact HUD’s Financial Operations Center.
(5) Discharge of Junior Liens
The Mortgagee must provide for the discharge of junior liens as follows:
• The Borrower must satisfy or obtain release of liens.
• If the Owner-Occupant Borrower receives compensation ($3,000), this compensation may be applied toward discharging liens.
• If no other sources are available, the Non-Occupant Borrower may obligate up to an additional $1,500 from sale proceeds toward discharging liens or encumbrances.
(6) Section 235 Recapture
The Mortgagee must first determine if the Mortgage is subject to recapture as referenced in Section 235 Mortgages. If a recapture amount is owed to HUD, the
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Mortgagee must contact HUD’s Loan Servicing Contractor prior to approving the PFS.
(L) Closing and Post-closing Responsibilities
(1) Mortgagee Responsibilities Prior to Closing
The Mortgagee must provide the Closing Agent with:
• form HUD-90052, Closing Worksheet: Pre-foreclosure Sale Procedure, which lists all amounts payable from Net Sale Proceeds; and
• the PFS Addendum that was signed by:
o buyers;
o buyers’ agent;
o sellers;
o sellers’ agent (listing agent); and
o transaction facilitators/negotiators, if applicable.
The Mortgagee must receive from the Closing Agent:
• a copy of the Closing Disclosure or similar legal document which includes a calculation of the actual Net Sale Proceeds, and
• the executed form HUD-90052, which must be included in the Servicing File and the Claim File.
The Mortgagee must review the Final Terms of the PFS Transaction to ensure that:
• the final terms of the PFS transaction are consistent with the sales contract;
• only allowable settlement costs have been deducted from the seller’s proceeds; and
• the Net Sale Proceeds will be equal to or greater than the allowable thresholds.
(2) Closing Agent Responsibilities after Final Approval
Once the Mortgagee gives final approval for the PFS and the settlement occurs, the Closing Agent must:
• pay the expenses out of the Net Sale Proceeds and forward the Net Sale Proceeds to the Mortgagee;
• forward a copy of the Closing Disclosure or similar legal document to the Mortgagee to be included in the Servicing File and the Claim File no later than three business days after the PFS transaction closes; and
• sign the PFS Addendum on or before the date the PFS transaction closes, unless explicitly prohibited by state statute.
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(3) Satisfaction of Mortgage Debt
Upon receipt of the portion of the Net Sale Proceeds designated for Mortgage satisfaction, the Mortgagee must satisfy the Mortgage debt and may file a claim for mortgage insurance benefits.
(M) Early Termination of PFS Program Participation
(1) Standard
(a) Borrower-Initiated Termination
The Mortgagee must permit a Borrower to voluntarily terminate participation in the PFS Program at any time.
(b) Mortgagee-Initiated Termination
The Mortgagee may terminate a Borrower’s PFS Program participation at its discretion for any of the following reasons:
• discovery of unresolvable title problems;
• determination that the Borrower is not acting in good faith to market the Property;
• significant change in property condition or value; or
• the Mortgagee has approved the Borrower for a Permanent Home Retention Option after the Borrower advised the Mortgagee that their financial situation has improved, and they want to retain their home.
(c) Notification of PFS Program Participation Termination
The Mortgagee must send the Borrower a written notice providing the reason for terminating their PFS program participation and the termination date of the PFS.
(2) Required Documentation
The Mortgagee must retain a copy of the Notification of PFS Program Participation Termination in the Servicing File.
(N) Failure to Complete a PFS Transaction
At the expiration of the PFS marketing period, should the Borrower be unable to complete a PFS transaction, the Mortgagee must re-evaluate available Loss Mitigation Options as follows:
• If the Borrower’s financial condition has improved to the point that reinstatement is a viable option, review the Borrower’s eligibility for one of the Loss Mitigation Home Retention Options; and
• If reinstatement is not feasible, review the Borrower for a DIL of Foreclosure.
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Within 90 Days after the expiration of the PFS marketing period, the Mortgagee must approve the Borrower for an alternate Loss Mitigation Option or complete the first legal action to initiate foreclosure.
Should additional time be needed to complete a DIL or to initiate foreclosure, Mortgagees must submit a request for an extension of time for HUD approval via EVARS.
(O) Extensions of Foreclosure Time Frame for PFS
(1) Standard
After PFS early termination or option failure, HUD provides an automatic 90-Day extension to the deadline to complete a Loss Mitigation Option or to perform the first legal action initiating foreclosure. The automatic 90-Day extension begins the Day after the PFS ATP is terminated or expires.
If the Mortgagee has not yet received the Net Sale Proceeds from the Closing Agent and the automatic 90-Day extension is nearing expiration, the Mortgagee must submit a request for extension for HUD approval via EVARS no later than 10 Days before the 90-Day extension expires.
(2) Required Documentation
The Mortgagee must retain in the Servicing File and the Claim File documentation of any extensions received from HUD.
(P) Deficiency Judgments
If a foreclosure occurs after the Borrower unsuccessfully participated in the PFS process in good faith, neither the Mortgagee nor HUD will pursue the Borrower for a deficiency Judgment.
(Q) PFS Incentive
The Mortgagee may claim an incentive for each completed PFS transaction that complies with all HUD PFS requirements.
(R) Mortgage Insurance Termination
The Mortgagee must not submit a mortgage insurance termination on PFS transactions. HUD will only pay FHA mortgage insurance benefits when the status of the mortgage insurance is “active.”
The Mortgagee must report the PFS Sale to consumer reporting agencies.
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iii. Deed-in-Lieu of Foreclosure
(A) Definition
A Deed-in-Lieu (DIL) of Foreclosure is a Loss Mitigation Home Disposition Option in which a Borrower voluntarily offers the deed to HUD in exchange for a release from all obligations under the Mortgage.
(B) Disclosure Requirements for DIL
Prior to approving a Borrower for a DIL, the Mortgagee must notify the Borrower in writing of the following:
• The Mortgage must be in Default on the date the DIL special warranty deed is executed, pursuant to Section 204 of the National Housing Act (12 U.S.C. § 1710).
• DIL transactions are generally reported to consumer reporting agencies, and will likely affect the Borrower’s ability to obtain another Mortgage and other types of credit.
• If the Borrower is a servicemember, it is recommended that the Borrower obtain guidance from their employer regarding the DIL’s impact on their security clearance and employment.
(C) DIL Options
There are two types of DIL options: Standard DIL and DIL for Servicemembers.
(1) Standard DIL
A Standard Deed-in-Lieu (DIL) is a DIL transaction for Owner-Occupant Borrowers and Non-Occupant Borrowers.
The Mortgagee must ensure that:
• the Borrower has attempted to complete a PFS;
• the Borrower and the Property meet the requirements for a Standard PFS; and
• the Mortgage is 61 Days or more Delinquent as of the date of the Mortgagee’s approval.
(2) DIL for Servicemembers
A DIL for Servicemembers is a DIL for servicemembers with PCS orders who must relocate to a new duty station at least 50 miles away from their existing residence, without the Mortgagee verifying hardship.
The Mortgagee must ensure that:
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• Servicemembers and the Property meet the requirements for a PFS for Servicemembers;
• the Mortgage is 31 Days or more Delinquent on the date the DIL special warranty deed is executed; and
• Servicemembers have attempted to complete a PFS Option.
(3) DIL Exceptions for Borrowers with More than One FHA-Insured
Mortgage
The Mortgagee must obtain a certification from the Borrower that the Borrower does not own any other FHA-insured Property.
If the Borrower owns more than one FHA-insured Property, the Mortgagee must submit a request for HUD approval via EVARS to offer a DIL Option to a Borrower who owns more than one FHA-insured Property.
(4) Condition of Title
The Borrower or Mortgagee must convey a clear and marketable title to the Secretary. The Mortgagee must obtain a title search or preliminary report and determine whether the title is impaired by:
• unresolvable title problems;
• liens that cannot be discharged as permitted by HUD; or
• a PACE obligation.
(5) Deficiency Judgment
HUD will not accept a DIL when it has elected to pursue a deficiency Judgment against the Borrower.
(D) DIL Owner-Occupant Borrower Relocation Assistance
(1) Amount of Relocation Assistance
HUD offers Owner-Occupant Borrowers up to $3,000 in relocation assistance upon vacating the Property and satisfaction of the requirements of the DIL Agreement. HUD will not pay this relocation assistance if the Property is occupied at conveyance.
(2) Use of Relocation Assistance
The Owner-Occupant Borrower may apply the entire amount of the relocation assistance or a portion of it to resolve liens, including PACE obligation liens.
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(E) DIL Agreement
(1) Standard
The Borrower and the Mortgagee must execute a DIL Agreement in writing. HUD does not require a specific format for documenting a DIL Agreement. The Mortgagee must ensure that the DIL documentation complies with all applicable laws and regulations.
(2) DIL Agreement Terms
The Mortgagee must ensure that the DIL Agreement contains the following:
• certification that the Borrower does not own other Property subject to a Mortgage insured by or held by HUD;
• the Transfer Date;
• notification of possible income tax consequences;
• acknowledgment that Borrowers who comply with all requirements of the Agreement will not be pursued for deficiency Judgments;
• a statement describing the physical condition in which the Property will be conveyed;
• agreement with the Borrower to convey the Property vacant and free of Personal Property, unless HUD has approved an Occupied Conveyance;
• itemization of keys, built-in-fixtures, and equipment to be delivered by the Mortgagee on or before the Transfer Date;
• evidence that utilities, assessments, and HOA dues are paid in full by the Transfer Date, unless otherwise agreed to by all parties; and
• the amount of relocation assistance payable to and/or on behalf of the Owner-Occupant Borrower will not exceed $3,000.
(3) Required Documentation
The Mortgagee must retain a copy of the executed DIL Agreement in the Servicing File and the Claim File.
(F) DIL Conveyance to HUD
(1) Mortgage in Default
The Mortgagee must ensure that the Mortgage is in Default when the DIL is recorded and the Property is conveyed to HUD.
(2) Discharge of Liens
The Mortgagee must provide for the discharge of liens as follows:
• The Mortgagee must complete a title search and ensure the release of liens and/or endorsements to the title policy are obtained.
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• HUD will not accept titles subject to most liens, including IRS and HOA liens. HUD will allow liens securing repayment of Section 235 assistance payments, Partial Claim advances, and Title I liens.
• HUD will allow a notice of lien recorded in the land records securing repayment of a PACE obligation that may only become subject to an enforceable claim (i.e., a lien) for delinquent regularly scheduled PACE special assessment payments and otherwise complies with the eligibility and acceptability criteria for Properties encumbered with a PACE obligation provided in PACE Obligation Review.
• If the Owner-Occupant Borrower receives relocation assistance, this assistance may be applied toward discharging liens.
(3) Special Warranty Deed
The Borrower and the Mortgagee must convey the Property through a special warranty deed and, when possible, the Borrower must convey title directly to HUD. The Mortgagee must cancel and surrender to the Borrower the original credit instrument, indicating that the Mortgage has been satisfied.
If it is necessary to convey title to the Mortgagee, and then to HUD, the Mortgagee must document the reason in the Servicing File and the Claim File.
(4) Conveyance Time Frame
The Mortgagee must record the special warranty deed and deliver the original, recorded deed to HUD’s MCM within 45 Days of the date the clear and marketable title was conveyed to the Secretary.
(5) Occupied Properties
The Mortgagee must ensure that the Property is vacant at the time of conveyance.
HUD will not accept a DIL if the collateral Property is occupied at the time of conveyance to HUD, unless authorized for Occupied Conveyance.
(6) Option Not to Convey
The Mortgagee may elect not to convey title to HUD and to terminate the contract of mortgage insurance. If this occurs, the Mortgagee must use form HUD-27050- A, Insurance Termination, and select Voluntary Termination (Term Type 21) in FHAC to notify HUD.
(G) DIL Incentive
The Mortgagee may submit a claim for an incentive for each completed DIL transaction that complies with all HUD DIL requirements.
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(H) DIL Foreclosure Time Frames
The Mortgagee must complete the DIL or initiate foreclosure within six months of the date of Default, unless the Mortgagee has qualified for an automatic extension or has received an extension approved by HUD via EVARS. If the DIL follows a failed PFS, the DIL must be completed or foreclosure initiated within 90 Days of the failure.
(I) Reporting to Consumer Reporting Agencies and the IRS
The Mortgagee must not report DIL transactions to consumer reporting agencies as foreclosures.