How to Get a HUD Approved for a Short Sale
The HUD-1 is a loan regulated by RESPA. The document spells out, in a uniform manner, all of the debits and credits in a real estate transaction.
The HUD document is actually for the buyer's benefit. It is not for the short sale bank's benefit and is really none of the short sale bank's business, apart from the fees deducted from the sales price. If anything, the HUD involves the buyer's bank rather than the seller's bank.
Below, find out the benefits of a HUD and learn what banks look at most closely so that you can maximize your chances of getting approved.
Who Can Approve a HUD-1 Short Sale
Surprisingly, not every bank requires HUD approval. For example, many junior liens do not approve HUDs. 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. It's not the same way the other way around.
The primary liens care very much about how much is paid to the junior lien, and who pays it. There are some circumstances in which second lenders try to get sellers to commit mortgage fraud. The second lenders suspect another lender will reject the HUD if the seller pays them any large amounts of money, they tell sellers to break the law.
What Short Sale Banks Pay Attention to in a HUD
In a complete short sale process, banks actually deal with two steps to HUD approvals. First, the bank approves the preliminary estimated HUD-1 settlement statement. Then, just before closing, the bank approves the final HUD.
The obvious and most important number they look for is the sales price.
Sometimes a bank 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, the best way to net the bank more money is to ask the buyer to increase the purchase price.
They look for purchase prices that disregard a full-fledged appraisal.
With so much money at stake, one would 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 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 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.
The bank will examine the 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
What Happens to Rejected HUD Costs for Short Sale
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 biggest problem involved in a short sale HUD is many negotiators do not know how to read them. They don't understand seller credits on a HUD are not always a credit to the buyer.
Changes in RESPA require any fees reflected on the buyer's good faith estimate must show as a credit to the buyer if they are paid by the seller. What negotiators don't realize is they also show as a debit, which washes out the credit to the buyer.