What is a HUD -- Why Do Banks Want a HUD?
The HUD-1 is a RESPA document that spells out in a uniform manner all of the debits and credits in a real estate transaction. A HUD is actually for the buyer's benefit. It is not for the short sale bank's benefit and really is 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, not the seller's bank.
But that doesn't stop a short sale bank from asking for it and demanding changes during its approval process. Fortunately, not every bank requires HUD approval. For example, many junior lienholders do not approve HUDs. That's because most junior lienholders care only about the amount of the check that is payable to them.
The sales price, who pays what and how much commission is paid, the second lienholders are pretty lax about. It's not the same way the other way around. The primary lienholder cares very much how much is paid to the junior lienholder, and who pays it. There are some circumstances in which second lenders try to get sellers to commit mortgage fraud. That's because the second lenders suspect the first lenders will reject the HUD if the seller pays them any large amounts of money, so they tell sellers to break the law.
What Banks Examine on a HUD for a Short Sale
The obvious and most important number on a HUD is the sales price. Sometimes a bank might say it needs to net a certain amount, and that net amount might be more than the net on the HUD. In those types of situations, the best way to net the bank more money is to ask the buyer to increase the purchase price.
Purchase prices that banks approve are rarely based on 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 -- not even necessarily a neighborhood specialist -- to give the bank a down-and-dirty quick opinion of value they call a BPO. They pay $50 to $100 for a BPO. This is an excellent example of being penny wise and pound foolish, like my mother used to say.
This is the reason that many short sale agents will price a short sale the same way a BPO agent will assign 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 is in line with the BPO.
The bank will then examine the other fees charged to the seller on the HUD. You might wonder who is the seller of a short sale, 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, doc prep and wire fees
- Doc stamps
- Delinquent property taxes
- Tax prorations
- Discounted payoffs to junior lienholders
- HOA fees, if any
- Buyer credit for closing costs
Types of Fees Short Sale Banks Reject on a HUD
Every so often a bank will agree to pay for a pest report or a home warranty but rarely. Banks almost never pay for repairs on a short sale. It is also very unusual for a bank to pay delinquent HOA fees or UCC filings.
If the bank will not authorize a certain fee, for example, say it wants 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.
Probably the biggest problem involved in a short sale HUD is the fact that many negotiators do not know how to read them. They do not understand that seller credits on a HUD are not always a credit to the buyer. Changes in RESPA require that 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. Try explaining that one to an $8-an-hour clerk.