The Basics

• As an agency within the U.S. Department of Housing and Urban Development, or HUD, FHA does not make loans to borrowers. It insures loans made by direct lenders and pays the lender in the event of homeowner default.
  
  To initiate the sale process of an FHA-insured property, the borrower must request a payoff statement from the lender or mortgage servicing company that shows the amount due in full at the close of escrow. FHA borrowers may sell their home with or without the help of a real estate broker.
  
  

Types

• FHA's 203(b) insurance for single-family one- to four-unit properties is the agency's most widely used program. FHA also insures loans for HUD-approved manufactured homes, as well as single-family homes with FHA's reverse mortgage program, the Home Equity Conversion Mortgage, or HECM. A HECM loan becomes due and payable in full when the borrower dies or sells the home.
  
  In addition to a traditional sale in which the sale proceeds are enough to pay off the mortgage debt owed, borrowers may request that FHA allow them to sell the home for less than what is owed through a short sale.
  
  Some FHA loans are assumable. In an assumption sale transaction, the buyer assumes responsibility of the existing FHA loan. The borrower must meet FHA's underwriting requirements to assume a loan originated after December 1, 1986.
  
  

Considerations

• At closing, FHA requires repayment of a partial claim promissory note. Partial claim liens are placed on a home's title when the borrower requires the one-time payment from FHA to bring his mortgage current with the lender.
  
  To short sale a home with an FHA mortgage, the borrower must be at least two months delinquent, be able to sell the home within three to five months and the appraisal ordered by the lender must show a market value that meets HUD guidelines.
  
  

Exceptions

• FHA loans generally do not have prepayment penalties, which are fees due to the lender based on early payoff -- prepayment -- of the mortgage, as agreed to prior to the homeowner closing on their purchase. FHA also does not permit "due on sale" clauses that require the borrower to remit full payment of the loan balance to the lender if they transfer or sell the property to someone else without the lender's permission.
  
  FHA can approve the clause if the FHA loan is made in connection with a tax-exempt bond financing by state or local governments, or a statutory restriction on assumption exists. In the event that either of these exceptions applies and the borrower sells the home, the seller must immediately pay the lender in full all sums owed within a specified time frame -- at least 30 days.