FHA Short Sales and the Approval to Participate Letter
- Jerad Larkin
- 7 hours ago
- 10 min read
What is an FHA Approval to Participate letter? An ATP is a letter FHA issues before foreclosure that states the appraised value and the exact net FHA will accept: 88% of value for days 1 to 30, 86% for days 31 to 60, and 84% for days 61 to 120. It is a pre approval for the short sale.
FHA is the most common short sale type on the board in Colorado right now, and I want to explain why before I get into the mechanics, because the why tells you how long this is going to last.
An FHA buyer puts 3.5% down. It costs 8 to 10% to sell a house once you add commissions, title fees, and closing costs. So the day an FHA buyer gets their keys, they are functionally underwater. That is always true. It just does not matter when the market is climbing, because appreciation covers the gap in a year or two.
Appreciation is not covering it right now. Which means essentially every FHA buyer from the last two years is upside down, and any one of them who hits a divorce, a job loss, or an illness has a short sale on their hands.
Here is the good news, and it is real: the FHA short sale program is genuinely well built. If you catch a file at the right time, FHA will tell you in writing exactly what they will accept, before you have a buyer. There is no other program that does that.
The Pre Foreclosure Program
This is the part you want to understand.
If a homeowner is behind but a foreclosure date has not been set yet, you are in what FHA calls the pre foreclosure window. Here is the sequence:
You submit the short sale package and all documents
FHA orders an appraisal on the property
FHA issues an Approval to Participate letter
That letter is the whole prize. It states the appraised value and the exact net FHA will take:
88% of appraised value for days 1 to 30
86% for days 31 to 60
84% for days 61 to 120
So you get about 120 days to work it, with the required net stepping down as you go.
Read what that actually means. Before you have a single offer, you have a document from the lender saying: we will not foreclose on you, here is exactly what we need, and here is how long you have. You get to price the listing against a number you already know the bank will accept.
When an offer comes in that hits the net, an approval letter can land in about a week. Not three months. A week.
How FHA compares to the other programs
Worth knowing, because it tells you what you are walking into the moment you identify the loan type:
FHA: 88% of value days 1 to 30, 86% days 31 to 60, 84% days 61 to 120
VA: 84%
Fannie Mae conventional: 88%
Freddie Mac: Program specific, confirm with the servicer
These are percentages of the appraised value, and what the lender is measuring is the net on the settlement statement, not the purchase price. Two offers at the same price can produce very different nets depending on concessions and fees, which is exactly what you will be negotiating later.
Put it in your broker remarks. Something like "Approval to Participate in hand, priced at the bank approved net." As buyer's agents get more familiar with short sales, that line is worth real money, because the thing buyers hate about short sales is the open ended waiting. You are telling them the waiting is already done.
What If It Is Already in Foreclosure?
Most of the process is identical. The difference is timing.
If the loan is already in foreclosure, FHA will not order the appraisal up front. You still submit everything, you still get it listed, and then they wait until you bring them an offer before ordering the value. Same percentages, same rules. You just do not get the ATP letter in advance, which means you are pricing without knowing the target.
That is a meaningful disadvantage, and it is why the NED list timing matters so much. Catching a file before the foreclosure filing is the difference between working with a known number and guessing.
The Five FHA Rules That Trip Agents Up
1. Home retention comes first, always
FHA is a government loan program, and the government's first priority is keeping people in their homes. So before FHA will review a short sale, they will offer the borrower a loan modification.
I heard the same story from more than one agent in that class. They listed the property. They spent their own money on photos and marketing. They found a buyer. The bank offered the seller a loan modification, the seller took it, and the agent got nothing.
Ask the question at the listing appointment. Is there any chance you want to keep this house? If there is even a maybe, tell them to call their bank and have the loan modification conversation before you list anything. You do not need to be part of that call.
Here is what a modification actually looks like, so you can help them think it through. The bank takes the past due amount, packages it up, adds it to the balance, and re amortizes, usually back out to 30 years, and increasingly to 40 to keep the payment down. It is not a payment cut. If someone is $20,000 or $30,000 behind, their new payment is likely a few hundred dollars higher than the original.
So a modification realistically works for exactly one profile: someone who lost a job, fell far behind, and now has a new job at similar or better pay but cannot catch up the arrears. If they are making less money than before, a higher payment does not help them.
Most short sale sellers do not fit that profile, which is why most short sales start with a letter stating the borrower is opting out of home retention and requesting a short sale review.
2. They must be 61 days past due
FHA will not review a short sale until the borrower is 61 days behind.
This is an awkward conversation and you need to handle it correctly. You cannot tell someone not to pay their mortgage. What you can do is state the rule and let them decide.
The framing I would use: I cannot tell you what to do about your mortgage payment. What I can tell you is that FHA has a rule that they will not review a short sale until the account is 61 days late. Let me know how you want to proceed.
The underlying logic is simple. If the bank is getting paid, and they are going to recover their money either way when the house sells, they have no reason to prioritize a short sale review. They will happily take payments for as long as someone will make them.
3. Two documents need wet signatures
The authorization letter and the hardship letter both need real ink signatures, physically signed and dated.
The reason is fraud. In the last cycle there was an enormous amount of it, including people electronically signing authorization letters giving strangers permission to talk to banks and sell homes the owners had not agreed to sell. So FHA now compares the signature on these documents against the signature on the mortgage.
Same reasoning behind the anti fraud and arm's length affidavit. Everyone on the buy side, everyone on the sell side, and the title company all sign it, confirming nobody at the table is related or working an inside deal.
4. Concessions cap at 3%, and they cannot buy down the rate
The bank is eating a loss on this transaction. They are not going to fund a rate buydown for a buyer they have never met.
Concessions are capped at 3% and can go toward closing costs, but not a rate buydown. And there is no working around this, because the bank sees both sides of the settlement statement three days before closing and approves it.
That is a change from the last cycle, when only the seller side went over. They tightened it because of how much money was moving around on the buyer side, including seller kickbacks.
Practical effect: if you are used to structuring deals with a big concession going to a buydown, that structure does not exist here. Plan for it in how you present the property.
5. HOA gets the six month super lien and nothing else
Colorado is a super lien state. The HOA sits ahead of the first mortgage for six months of dues, which is why HOAs will sometimes foreclose. They know the first will not risk losing position over the arrears.
FHA pays that six months. No late fees, no interest, no attorney fees.
There is a real condo problem in Colorado right now because of this. A concrete example from that class: a condo selling around $200,000 with $8,000 in past due HOA. After hard negotiation, the bank agreed to pay about $2,800, roughly a year of dues. That leaves a $5,000 gap, and the seller is not permitted to bring money to the table.
Which leads to the single most useful thing you can tell a struggling seller early.
Tell Sellers to Keep Paying HOA and Water
If someone cannot pay their mortgage, that is the reality. But if there is any way at all to keep paying the HOA dues and the water bill, they should.
HOA arrears turn into a gap nobody can close. Water has its own quirk in Colorado: we escrow water rather than issuing a final bill, and lenders do not like the word escrow on a settlement statement. To them, a $200 water escrow reads as money that eventually flows back to the seller, and the seller is not allowed to receive money. So they will sometimes refuse to allow it on their side and require someone else to cover it.
It is usually a small number and a buyer will often absorb it. But it is one more thing to solve at the finish line, and the whole game at the finish line is having as few of those as possible.
What Goes in the Hardship Letter
Put all of this in the first draft. If you do not, the bank will look at it, ask for a letter with one more element, look at that, and ask for another. That loop costs about three weeks.
The hardship letter should state:
The date the hardship began
That the borrower is requesting a short sale review
That the borrower is opting out of all home retention options
That the borrower can no longer afford the mortgage
Whether the borrower owns any other FHA insured properties
Physically signed and dated
That last item is newer. Somebody somewhere had multiple FHA insured properties, and now everyone gets asked.
One Thing to Watch: HUD Partial Claims
This one confuses people, so it is worth flagging.
If the borrower did a loan modification at some point, the past due amount that got rolled up can show as a separate lien on title. It looks like a second mortgage. It is not.
A partial claim must be paid in full, and it is effectively part of the first. So when you get the ATP letter with a required net and you are staring at a $30,000 partial claim wondering how the math could possibly work, the answer is that you add them together. The first takes a slightly bigger short and it all nets out to the ATP number.
You are not negotiating a partial claim. Your title closer will flag it on the settlement statement, and you just fold it into the first's number.
Frequently Asked Questions
What does the FHA Approval to Participate letter guarantee?
It states the appraised value and the net FHA will accept, stepping down from 88% of value in days 1 to 30, to 86% in days 31 to 60, to 84% in days 61 to 120. It also means FHA has agreed not to foreclose during that window while the property is actively marketed.
Can concessions be used to buy down a buyer's rate on an FHA short sale?
No. FHA allows a maximum of 3% in concessions and specifically will not approve concessions used for a rate buydown. The lender reviews both sides of the settlement statement roughly three days before closing and will not approve it.
How far behind does a borrower have to be for an FHA short sale?
FHA will not review a short sale until the account is 61 days past due. Agents should state the rule and let the homeowner make their own decision rather than advising anyone to stop paying their mortgage.
Does FHA pay past due HOA dues in a short sale?
Only the six month super lien amount that Colorado law puts ahead of the first mortgage. FHA will not pay late fees, interest, or HOA attorney fees, which creates a gap on properties with significant arrears.
Can a seller get another FHA loan after a short sale?
There are waiting periods, commonly cited around two years, but the real answer depends on credit recovery and the specific circumstances. Send your client to a lender for a definitive answer rather than quoting a rule that may have changed.
This post is part of a series I built from a three hour short sale CE class. The full walkthrough is here: Short Sales in Colorado: The Complete Guide for Real Estate Agents.
The related pieces you will probably want next:
As an Account Executive with Chicago Title of Colorado, a good chunk of my job is making sure agents in Denver Metro have this kind of information before they need it rather than during a panic. If you have an FHA file in front of you and you want help figuring out where it sits in the process, reach out.
Want more tools, tactics, and resources like this? Subscribe to my weekly emails at milehightitleguy.com. I share real estate marketing ideas, AI tools, and exclusive invites to upcoming classes and events across Colorado.
This content is for general informational and educational purposes only. It reflects my personal opinions and industry experience and is not legal, financial, or tax advice. FHA guidelines and lender programs change, so verify current requirements independently and direct your clients to a licensed lender, attorney, or tax professional as appropriate.
Jerad Larkin The Mile High Title Guy Account Executive, Chicago Title of Colorado 303.630.9430 | Info@MileHighTitleGuy.com milehightitleguy.com
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