If you're considering purchasing a short sale, you might also be looking at various forms of mortgage assistance. HUD loans and FHA loans are two of the most common types of assistance you can find. The trick is getting your government-backed loan approved for a short sale.
The Department of Housing and Urban Development, or HUD, is a government department created to assist in various matters related to America's housing needs, including loans to homebuyers who may not otherwise be able to afford a home purchase. Both HUD loans and FHA loans are backed by the government and allow for lower down payments and easier credit qualifications.
A HUD loan is limited to Native Americans through the Section 184 loan program.
When You Might Need a HUD Loan
One reason you might be looking to purchase a short sale is that you may not be in a position to purchase a home for full price. If that's the case, you might also be in need of more flexible loan terms. It's possible to get an FHA loan with a down payment as low as 3.5% of the home price, and HUD loans (for Native Americans only) can go as low as 1.25% down. Both loans make it easier for borrowers who have poor credit to qualify as well.
Let's focus on the HUD loan specifically, and learn what banks look at most closely so that you can maximize your chances of getting approved for a HUD loan with a short sale.
Who Can Approve a HUD Short Sale
In order to get a HUD loan, you'll first need to go through a HUD-approved lender. You can search the HUD website to find a lender in your area. HUD loans are not approved in every county of every state, so you might automatically be disqualified based on where you live.
To qualify for a HUD loan, as with an FHA loan, you must only be seeking to purchase a home of no more than four units as your primary residence.
Beyond that, part of the approval will come down to any liens the seller has on the home. Many junior (secondary) lien holders may not be involved in the HUD approval. That's because most junior lien holders care only about the amount of the check that is payable to them. They are pretty lax about sales price, who pays what, and how much commission is paid. Primary lien holders, on the other hand, care very much about how much is paid to the junior lien and who pays it.
What Short Sale Banks Pay Attention to in a HUD
In a complete short sale process, banks actually deal with two steps to HUD loan approvals. First, the bank approves the preliminary Closing Disclosure, which details an estimate of all costs associated with closing the sale. Then, just before closing, the bank approves the final Closing Disclosure. There are a few key factors the seller's bank looks at on these documents.
The Sales Price
Sometimes the bank for the seller might say the sale needs to net a certain amount, and that net amount might be more than the net on the HUD. In those situations, you may have to raise your offer, which, of course, would be contingent on your approval for a larger HUD loan.
A BPO Instead of a Full Appraisal
With so much money at stake, you might think a bank would want to hire an independent appraiser to assess value. However, most banks pay a random real estate agent who isn't even necessarily a neighborhood specialist to give the bank a quick opinion of value they call a broker price opinion (BPO).
They only pay $50 to $100 for it. The reason many short sale agents price a short sale the same way a BPO agent assigns value is because they don't want to fight with the short sale bank. It doesn't matter if the sales price is market value as long as it's in line with the BPO.
Other Fees Charged to the Seller
You might wonder who the seller of a short sale is, and that person is the seller. The bank simply approves the fees the seller will pay. Normal fees for a seller's closing costs are:
- Commission to the real estate brokers/agents
- Title and escrow fees
- Transfer fees
- Recording, notary, document prep, and wire fees
- Document stamps
- Delinquent property taxes
- Tax prorations
- Discounted payoffs to junior liens
- HOA fees, if any
- Buyer credit for closing costs
If the selling bank doesn't approve some of these fees, it might not approve your HUD loan. Likewise, your lender may only allow the seller to credit you a maximum percentage of the closing costs.
What Happens to Rejected HUD Costs for a Short Sale?
You also need to consider any other costs you might be asking the seller to pay. Every so often, a bank will agree to pay for a pest inspection or a home warranty, but don't expect them to pay for the following:
- Delinquent HOA fees
- UCC filings
If the bank will not authorize a certain fee, for example, to reduce the escrow fee from $1,500 to $500, what happens to the balance? Somebody has to pay that fee. It could be the seller or it could be the buyer. Escrow could decide to reduce its fee, but that is unlikely.
The Bottom Line
If you're looking to get purchase a short sale on a HUD loan (or an FHA loan), it's possible. It's simply a matter of going through the right channels to secure a loan, and then working with both your own lender and the seller's bank to make sure you can come to an agreement that works. The process may take longer than a traditional home sale, but the deal you get on the home if you can make it work may make it worth it.