Declining property markets see the rise of the short sale, which happens when a homeowner owes more to his mortgage lender than the value of his home. Short sales are tricky to secure. Put simply, the borrower must persuade his lender to approve a sale price that is less than the outstanding mortgage, and forgive part of the loan. This inevitably causes the lender loss. To protect his interests, a mortgage lender who agrees to a short sale takes effective control of the sale transaction, though rarely attends closing. The homeowner can choose whether or not to attend.
A short sale is a peculiar thing, as the homeowner has no true control over the process, despite the fact that the home is legally the seller's property until the transaction closes. It is the lender who controls the transaction. To begin with, the lender must approve the fact of the short sale, a process which is notoriously slow. Once approved, the lender provides a detailed letter of instruction stipulating how the transaction is to proceed.
Essentially the seller carries out the lender's legwork. He must comply with the lender's transaction instructions to the letter. According to Bigger Pockets, lenders frequently insist that short sales close very quickly. This requires the seller to have listed his property, found a buyer and prompted that buyer to arrange financing, before the lender's instruction letter comes through. The seller must then adhere to every contingency laid out by the lender, or risk the sale falling through.
The mortgage lender does not typically attend closing, as its instruction letter contains all the information that the seller and buyer need to close the deal. This includes the exact amount the lender expects to receive to settle the loan, details of how the money is to be transferred and a deadline for payment. Failure to comply with any term of the lender's instruction letter can jeopardize the sale.
The procedure at closing is much the same for a short sale as it is for any other real estate transaction. The seller's legal representative attends. The seller himself does not need to attend, as long as he has previously signed all necessary documents. However, because it is critical to comply with the lender's instructions, it is wise for the seller and his agent to check and recheck closing procedures -- that documentation bears the correct signatures, for example, and that the settlement statement (HUD-1) is accurate against the lender's expectations for payoff and commissions approved for payment. The seller of a short sale property may choose to attend closing, in case any last minute issues arise.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.