When your seller has an FHA mortgage on their home, these are the guidelines . The homeowner should go ahead and apply and send in the complete financial package required by the bank to the bank or servicer when the listing is taken (or even before if possible). An appraisal will be done by an FHA certified appraiser.

When the appraisal comes in and the short sale package is approved the bank will issue a HUD-90045 which will list the price that the home should be sold for. This listed price on the HUD-90045 Approval to Participate will reflect 88% of the appraised value, so depending on the length of the marketing period this price will decrease to a floor of 84% of the appraised value.

When a contract comes in, as long as it meets the details in the guidelines (net proceeds, closing costs, etc.) , it should be approved. The guidelines only give the bank 5 working days to review the contract for sale if the seller has already been approved for the program. (Caution: Allow more time than this for the lienholder approval in your contract because this is not always followed!)

The bank is not allowed to accept an offer that does not meet the minimum allowable thresholds. Important Note: The marketing period for purposes of the net proceeds calculation does not start until the Approval to Participate (HUD-90045) has been issued!

Rules issued by HUD 12-24-08 for the FHA Preforeclosure Sale program. The rules outline net proceeds, acceptable closing costs, payment of liens, etc. :
08-43 PFS Program guidelines issued 12-24-08.

Application to Participate: HUD application to participate preforeclosure sale.pdf (May not have to be included any more, but I do since I can't find a HUD-90035 that has been revised since 6/2003)

HUDs Information Disclosure Form (HUD-90035)HUD 90035-Information Disclosure.pdf
Supposedly the 90035 was updated when the new rules were issued in 12/08 to incorporate both 90035 and 90036 but I have not been able to find an updated 90035. I just submitted the application 90036 on my last FHA short sale and didn't have a problem.

Other HUD resources for FHA PFS program:
PFS Fact Sheet revised 02-04-09.pdf
PFS Program FAQs
SAMPLE HUD--90045.pdf
FHA Appraisal dispute guidelines_new.pdf