The Importance Of Understanding Hud's When Doing Short Sales

By Author: Svein Groem
Total Articles: 9
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In the initial offer, the HUD-1 numbers are not exact (but the form needs to be accurate) and are normally the responsibility of the investor. As the deal moves through the approval process and toward a formal closing, a title company will normally produce a final HUD-1, with exact numbers.

DELINQUENCY: The day after a payment is due, a loan is DELINQUENT. For example, if the grace period runs until the 16th of each month (as it does for most conventional and FHA loans) payments made from the 17th to the end of the month results in the loan actually becoming DELINQUENT for a short period each month.

DEFAULT: A loan is IN DEFAULT as soon as any payment has been due and unpaid for more than 30 days. Lenders normally have collections departments established to handle owner's of loans in different stages of default.

FORECLOSURE: The legal process by which a lien holder repossesses a property.

FORECLOSING ATTORNEY: Attorney representing the foreclosing lender. A knowledgeable attorney can be a great asset in getting short sales through the system.

NOTICE OF ELECTION AND DEMAND (NOD or NED):This ...
... is the result of legal action taken on behalf of the lien holder. This notice serves to inform the borrower and the public that their property has entered the foreclosure process and will be sold at an auction at some specified date (about 110 to 120 days henceforth). Foreclosure lists are normally generated from "NOD" lists.

PUBLIC TRUSTEE: My state has a third party representative in between the lender and the borrower (and the public) in a deed of trust state. They conduct the public aspects of the foreclosure process. After the NOD (also commonly called NED) is filed, the homeowner generally has to work through the appropriate county public trustee to work on their loans. Each county has a Public Trustee's office whose charter is to notify the public and, receive cure payments, and to conduct auctions. Most states do not have public trustees.

CURE: An amount of money determined by the bank and the bank's attorneys needed to pay all arrearages on the delinquent loan. Successful curing will result in a withdrawn NOD, and a re-instated mortgage.

AUCTION: A foreclosure sale. An auction is the public sale of a mortgaged property, following foreclosure of the loan secured by the property. In today's market, it's typically the 1st lien holder who promulgates the typical auction and ends up with the property.

nd now some key Bank Personnel/Terms :

SERVICING COMPANY: Most entities that we think of as "banks" or "lenders" are actually service providers, that are servicing a loan for some third party. The actual lien holder could be a group of investors (Wall Street) or even a country. Short sales are typically transacted through the service provider.

DATA COLLECTOR: Level one person at a servicing company (bank). After a short sale package and offer has been sent in, their responsibility is to ensure that all of the short sale documents are appropriate. They forward the package to the assigned mitigator for determination. These people can be the most challenging people to interface with through the entire transaction.

LOSS MITIGATOR: Level two person at a servicing company (bank). After a short sale package and offer has been sent in, they "mitigate" the bank's loss by following a set of mathematical computations (internal to the bank). Most of the time, a loss mitigator has approval authority of a short sale offer. Sometimes the losses are sufficiently large that the short sale approval process may involve the management chain as well as the investor.

And finally some Bank Workout Options:

These service providers have more options than just short sales. Below are a list of the more common options and their relative meanings:

Reinstatement--Catch-up on late payments and bring the loan current--can also be called a "Cure."

Forbearance--Take the total of the arrearages and divide this number by six or twelve months. Homeowner has to be able to pay this amount monthly PLUS their regular monthly payments. Low probability of success, and bank's do not favor these.

Loan Modification--Basically a "re-casting" of the loan. The bank reps will take the total of the arrearages and pile it on to the principle (the bank can even alter interest rates). Homeowner must qualify for this option. Sometimes the bank will discount the interest rate and even the principle balance. Currently there is over a 50% default rate on modifications that are zero to eight months old.

Short Sale--The bank takes less than what is owed. The lien holder may seek monies owed.

Deed in Lieu--Sign over deed and give keys to bank and walk away. Junior liens normally kill this option. This option is sometimes called "Cash for Keys."

Foreclosure--A repossession of the property by the lien holder (1st normally). These properties are known as REOs (Real Estate Owned).

An example of the form can be found on the HUD website.

One of the most important skills for the foreclosure investor is to be able to properly complete the HUD-1 Settlement statement. In a short sale (and "regular" real estate transactions), this form dictates who gets how much money. Period.

The HUD-1 form is under control of the Real Estate Settlement Procedures Act (RESPA). This act reads that the form is to be distributed to all parties one day prior to closing. However, some closings have very short time constraints and the final HUD-1 may be distributed shortly before the closing.

The two-page form is divided into sections, with Seller details on the right and Buyer details on the left. These sections are further divided by row numbers. We'll focus on the seller's side of the form, because that is the side that the lenders examine in a short sale.

Since most title companies will not do numerous prelim HUD-1s on deals that do not close, it is imperative that the foreclosure investor lean how to accurately complete the HUD-1 form. It is the biggest tool used in the negotiation process.

The key point is to understand that we have to be ever more diligent on calculating the offer. Note, formulas used to calculate offers on long-term hold real estate are not at all related to fix and flip formulas, and these deals are normally disastrous for the unsuspecting investor.

We talk much more about this in the What2offer mentoring program. After years of doing these calculations by hand, my partner and I have developed an online real estate software to make our lives much easier. We can now crank out offers and determine the exit strategy in seconds.

To Your Success,

Tom & Svein
Tom and Svein are co-founders of What2offer. Go to http://www.What2Offer.com to learn how to crank out real estate offers in seconds with our powerful real estate software. Use our real estate investing program to instantly know if a investment property is for you, whether you're a wholesaler, rehabber, keeper, or assigner. Great for rent-to-own properties as well. Learn to crank out better quality real estate offers, which also helps you writing better real estate contracts. This software is also great for rental real estate investments as well as other real estate investments.

In addition, learn more about real estate investing with our top of the line real estate mentoring program. What2Offer is more than just the most powerful and easy-to-use offering software on the planet. It is an entire community of Training Videos, Live Calls, Tips & Tricks, and our wisdom of over 300 completed deals. AND it comes with a free trial.