At the very end of the short sale transaction, when everyone has totally lost their patience and is thrilled that the deal is finally going to close, the banks generally require a final review and sign-off on the settlement statement (a.k.a. HUD-1). In fact, many of the lenders make that requirement perfectly clear on the short sale approval letter.
These short sale lenders mean serious business when they say that they want to review the final HUD-1. And, even if they were wishy-washy during the short sale process, they will suddenly pull it together when it comes to checking and rechecking that final settlement statement. Believe it or not, I have seen many final settlement statements that were rejected at the eleventh hour.
A few weeks ago, I saw a settlement statement rejected because the buyer brought in about $300 more than what was required to close the transaction. The escrow officer had a $300 check written back to the buyer and indicated that item on the settlement statement. The employee at the bank argued that no money could be returned to the buyer in a short sale. Now, I know that no money can be returned to a seller in a short sale (unless it is approved by the bank as in the case of a HAFA short sale incentive), but the buyer? In this case, after a little back and forth, it became clear that this was merely a case where the bank wanted the information written a little bit differently and a few line items on the HUD-1 needed to be changed in order to get the final settlement statement approved.
I’ve also seen settlement statements rejected because of inconsistency in the buyers’ name. The offer names a single buyer. He adds his wife to the loan. Both names are on the settlement statement, so the bank rejects it due to the inconsistency. This, again, can be worked out but it is certainly a small hiccup in the short sale process.
A third and perhaps most exasperating situation with a HUD-1 rejection was something that I observed just the other day. I had written approval from a major lending institution on a short sale with two liens at the same lending institution. The approval letter referenced both loan numbers and allocated $3000 to the second lien holder. The HUD-1 was submitted for approval, and it was rejected. With that rejection was a phone message from the bank that stated that they were not the second lien holder. What? Huh? You reference the second lien in your approval letter with the loan number and all. The title report shows that you are the second lien holder. Worse than that, in this case, the second lien had been sold six months ago—three months BEFORE we even submitted the short sale. The good news (in this case) is that the new second lien holder provided an approval letter in less than two days.
But, it just goes to show you… you can never be too careful. And, you can never assume that the deal is over until you actually receive approval on that final settlement statement. And, even then, will these short sales come back to haunt us? You gotta wonder.
(As a side note, not all lien holders require approval of the final settlement statement. If you are unsure as to the procedures of the lien holders processing your short sale, it never hurts to double check before closing the transaction.)
Photo: flickr creative commons by seattleclouds.comShort Sale HUD-1 Approval Is Not Just a Formality by Melissa Zavala