Short Sale HUD-1 Approval Is Not Just a Formality

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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

About Author

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®. Before landing real estate, she had careers in education and publishing. Many folks say that Melissa is genetically pre-disposed to success with short sales. In fact, last year she and her staff obtained over 500 short sale approval letters! When she isn’t speaking with lien holders, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.


  1. Short sales are special opportunities that make it possible for homeowners to reduce the amount of financial impact they experience when they default on a home loan. It is important to keep in mind that in order to take advantage of the benefits offered by a short sale, the lender must provide approval and that is not always an easy task. It takes perseverance and patience.

  2. Bill Patterson on

    Yes they can come back to haunt you! We had one a few months ago where the lender approved the HUD, we closed the sale and re-sold to a cash buyer. This was a Friday and the lender came back on Monday and required $2,100 more on that day or they were going to “unwind” the sale. New buyer had moved in that weekend, so what to do? We got on the phone, pointed out an error and settled for paying an additional $1,400. Could we have fought them since they approved the HUD and their payoff? Maybe, but would it be worth it? Not for the $1,400, so we paid and put the deal to bed.

  3. Short sale are about 85% of my total business. I resisted them at first but finally have realized that if I am going to be a competent Realtor, either as a lister or a buyers agent, I had better learn how to work with the banks and attempt to close them. The one thing that I have to remember is that banks are not rational. Without that in mind my job is easier since I deal with the banks with no expectations on my end. it is what it is

  4. My lender submitted the hud for final approval 48 hours before closing like they asked. We were suppose to close a week ago, but didn’t get the approval. Now the short sale approval letter and contract expire in two business days and we still haven’t heard anything! What should we do? We’ve contacted every contact we had from the bank!

  5. Bill Patterson on

    It sounds like you are the buyer, Crystal. Assuming that the listing real estate agent negotiated the short sale and obtained the short sale approval letter, they should have a contact that they have been working with that can get this moving. Sometimes you need to move to a supervisor if the lender’s negotiator is not getting the answers that you need. Has the title company called? If they close many short sales, they may have a contact that can help. The real estate agent or other “authorized third party” needs to call, fax and e-mail until they can get this settled. It should be their full time project until you get your home!
    Good luck!

  6. Heather Mitchell on

    This may sound stupid, but, as a first time buyer of a HUD short sale, (or any short sale for that matter) I’m curious if it takes just as long to close on a HUD short sale as it does on a “regular” short sale? Are there fewer hoops to jump through? More? I’m paying all cash for the house I’m interested in and am looking for as much information as possible. What I’ve read is so confusing. I am waiting to hear from my Broker as well. The more information I’m armed with, the better off I’ll feel.

  7. Hello there , i just a have a quick question regarding short sale. We have an offer for short sale it has been exsepted, but not approved yet, can the title compamy prepare HUD 1statement before approval? Thanks in advance

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