Short Sale Cash Contributions at Closing
On many short sales, there’s a point at which the bank will tell us that the seller is required to come to the table with cash or a promise to sign a note for a certain amount of money.
In a specific example, a home owner has been told that they are on the verge of an approval, but until they either pay $3,500.00 cash or promise to repay $7,000 in cash over 120 months (that’s 10 years,) the approval will not be issued.
The bank will typically represent that the mortgage insurance company who holds a policy on the note is asking Wells Fargo to ensure they get a cash contribution before they’ll pay the claim on the loss from the short sale. They’ll say that it’s their request.
What’s Really Happening
Sometimes the MI company does request cash, but remember, the bank is in the business of getting your money in their pocket, and they’re not beyond using the ruse of a mortgage insurance company request to ensure you pay them so they recover more of their losses. So more than likely, the MI company has has NOTHING to do with the request.
The bank is telling the seller that the mortgage company needs a cash contribution, but the mortgage insurance company never told the bank that they needed it. This is a tactic that negotiators use which I contest is converted to incentives paid to negotiators for bringing in more money for the bank. The bank is still going to file their claim with the mortgage insurer to recover a vast majority of the losses, but the insurer will be none the wiser that they’ve just squeezed the seller for even more.
How I Handle This
I call their bluff.
As a “private investigator” for short sale approvals (that’s basically what we are,) I hunt down the truth. A simple friendly phone call to the mortgage insurance company will easily reveal whether or not the bank or servicer is telling the truth. When we learn that there was never a request, it means we have more information than they’d like, and that’s how one wins negotiations. The person with the most information wins, every time. (It’s also assumed that that person has walk-away power.)
What if they actually did make the request? That’s okay too, because that can also be negotiated away directly with the mortgage insurance company provided the details can be “worked out” as they call it. If the seller has no money, and no room in their budget for a promissory note payment (in our example $7,000 ÷ 120 months = $58.33 per month) then there can be no contribution.
Now, in light of the situation, $58.33 per month is a small price to pay for the mess that we’re cleaning up, but it’s absolutely unnecessary, and likely to be defaulted on. The notes are usually proposed at 0% interest, and $58.33 per month to a behemoth of a bank is less than peanuts. It’s not even peanut dust.
So, if it comes down to blows, and the MI company absolutely won’t budge, then a payment might be wise just to make the problem go away. You can see that we do everything we can to make sure that this is never the case.