The Lender Does Not Pay For Anything in a Short Sale
This is one of those misunderstood technicalities that I face every time I work with a potential short sale candidate. The common mis-understanding has been that when a home is sold short of what is owed, the lender or lien-holder pays the associated costs of closing the transaction such as broker commissions, seller’s closing costs, HOA dues and transfer fees, 2nd lien-holders, etc.
This is actually not true. The lender is not a party to the purchase contract. They are an authority whose decision the contract is contingent upon. A lender’s role is to approve of a lesser payoff than the amount owed. When the lender takes less, they make room for the seller to pay the fees associated with closing the transaction. Those fees come from the buyer’s purchasing power, and the 1st lien holder is basically saying, “we’ll allow the funds coming from the buyer to be credited to the seller in order that the seller may cover the associated costs of closing the sale.”
To have a successful short sale with a home owner who has no money to bring to the table, the lender must reduce their payoff enough to allow the difference between the purchase price and the net payoff to the lender to add up to the seller’s closing costs.
It may appear that the lender is paying the costs because they are accepting less than what is owed, but this isn’t actually the case.
On paper, on the HUD-1 closing statement, there is no mention of the lender paying for anything. The HUD is a document outlining what the buyer pays for and what the seller pays for.
For instance, if the sale price of a home has been negotiated between the buyer and the seller to be $200,000.00, but there is a balance due on the 1st lien-holder’s note of $250,000.00, and there are commissions, closing costs, HOA dues, and taxes to be paid, the lender is going to have to accept less than $200,000.00 by exactly the amount of the closing costs.
Add together the closing costs and the net payoff to the 1st, and you should reach your sales price. The lenders do not pay for anything in a short sale.