The
Approval Letter
After
the long, arduous process of successfully negotiating a Short Sale, the
Mortgage Company must issue an Approval letter; which provides the exact terms
under which the sale must take place. If any of the terms are not met, the ShortSale
cannot be completed.
The
Approval letter contains a plethora of information, stipulations, requirements,
and is a legally binding document.
Because of this, the importance of understanding what the Homeowner(s)
is/are agreeing to cannot be understated.
Furthermore, because of the Legal ramifications & implications, it
is highly recommended the
Homeowner(s) (and Buyer) seek Legal & Financial counsel prior to signing
anything. **After all, Real Estate agents are NOT Attorneys or Tax
professionals. Nevertheless, it is not necessary to have a degree from
Stanford or Harvard to be able to sufficiently comprehend the important terms
of the Approval letter.
Every
Lienholder involved in the ShortSale transaction must issue an Approval letter,
and generally speaking, each Lienholder will have a unique Approval letter,
with unique formats. However despite the
unique look, Approval letters all say the same thing: that the sale will be
approved if certain conditions are met.
Since the 1st Mortgage is the big dog, they will have the most restrictive
terms. Among other things, the 1st’s
Approval will dictate ~10 crucial conditions which must be fulfilled (even after the closing).
The
first condition/stipulation that the Approval letter will mention, are the
Seller & Buyer. The sale is only approved between the parties named
in the Contracts. The names must match exactly,
and Buyers cannot be substituted. If
anything changes, the ShortSale will be declined, & negotiations must be
restarted. For example, if the Purchase
Contract shows the Buyer with a middle initial, then their middle initial must
be included in everything else (Proof of Funds, HUD1, etc.). The same goes for all other parties to the
transaction. In the same vein as
verifying name congruity, is making sure the Property address is correct. Sometimes the property’s city will vary
between different documents, or sometimes the zip codes don’t match, or
sometimes the unit # is listed with the building # in front. All these seemingly insignificant details
must not vary in the least.
The
next few conditions in the Approval letter to verify are the offer price,
required net proceeds, & allowable closing costs. While there can be no fluctuation in the
offer price itself, the net proceeds are allowed to exceed the Bank’s requirement.
The allowable closing costs (RE commissions, subordinate lien payoff, HOA
payoff, Taxes, title charges, seller incentive) can also differ from the Bank
requirements, albeit conversely (cannot
exceed).
One
may wonder why any of the closing costs or numbers would vary even one iota,
when Bank’s are so picky & exact about everything else. The reason is customarily due to the closing
date. Generally, the Bank will give a
30-45 day window to close in the Approval, so if the closing happens sooner
than expected, the numbers can fluctuate (eg. fewer Taxes due). An important thing to remember is that the
Approval numbers are largely based off of the most recent HUD1, so it’s
recommended the closing date be scheduled accordingly.
The
Approval letter will most likely also mention required cash contributions, or
promissory notes from the Seller. Bank’s
will try absolutely everything in their power to recoup as much of their loss
as possible; so if the Homeowner has financial ability to do so, the Bank may
require them to make a direct cash contribution, or sign a promissory note to
complete the short sale. These two items
are negotiable though, and may make the difference between a lien release only, and a
full settlement.
Depending
on a multitude of factors, including but not limited to offer price, settlement
date, length & nature of loan delinquency, loan balance, foreclosure
auction date & financial standing, the Banks & lien holders may not
agree to provide a full release for the short sale. If the approval letter does not state specifically that the deficiency is
waived, or that the offer/payment is in exchange for full and final
satisfaction, it is likely that a deficiency judgment will be levied (post
short sale) for the remainder of the loan amount due. Keep in mind though, that some Banks may not
chase the Homeowner for the full remainder, and sometimes they “agree” to not
chase at all (despite not waiving their
right to do so, keeping deficiency verbiage intact). Deficiency judgment
language is one of the most important things to look at, since it is of
monumental importance to the Homeowner.
As such, it is highly recommended the Homeowner contact an
Attorney to determine 100% the effects of proceeding with the sale.
Finally,
the Approval letter & Bank will stipulate several resale terms,
such as “anti-flipping,” “sold AS-IS,” that the sale must be an “arm’s length
transaction,” and that the Homeowner cannot re-purchase or remain in the home
after the sale. Furthermore, in the
event that there are additional proceeds/funds in the deal, the Bank will
require that they be forwarded to them, not the Homeowner. Generally speaking,
the Homeowner is prohibited from receiving any funds from a ShortSale.
Any
incongruities between any of the Contracts, Approval letters, HUDs, Proof of
Funds, County records, Bank documents, etc. will result in an immediate decline
of the Short Sale. The extent of the
decline will generally depend on the nature of the incongruity. A new/different Buyer, for example, typically
means a 100% decline & start over, so it is imperative the Buyer is
legitimate, & fully motivated.
If
one knows what to look for in reading/interpreting the Approval letter(s), they
can save weeks, if not months of time by correcting the incongruities as they
arise; instead of waiting until the last minute. The bank worker who negotiates the offer is a
different worker than the closer, so they may not notice or be aware of certain
Investor criteria. It is a misstep in
judgment to “hope” that an incongruity will go unnoticed; the Bank will find
out. We are all human, and we all make
mistakes and/or oversights, so it’s always best to play it safe, just in case.
**Please be advised, neither Foreclosure
Solutions, nor any agent employed by Foreclosure Solutions is an Attorney, CPA,
or Tax Professional. As such, we are not authorized to provide legal or
financial advice.**
