When buying a home, usually the buyer is responsible for paying closing costs. However, if the sale is a short sale -- meaning the seller is selling the home for less than it's worth to try to pay off part of his mortgage -- the seller must get his bank to agree to the arrangement before he can close on the sale. If the seller can't get approval for a short sale, the deal will fall through. The seller may also face adverse financial consequences after a short sale, but the buyer doesn't have to worry about these.
Responsibility for Liens
If the seller doesn't have enough money to settle mechanic's liens or other unpaid liens on the property before closing, the liens become the new owner's responsibility. The new owner must then pay off the liens or risk foreclosure, even though he wasn't responsible for the initial filing of the lien. Thus, buyers should run a background check on the lien and purchase insurance against liens before closing on the home.
Sale Doesn't Go Through
If a seller doesn't have enough money to pay his mortgage, he may try to short sell the home -- that is, sell it for a lower price and pay off whatever he can on the mortgage. However, the bank must approve the short sale. If the seller accepts too low a price, he may not be able to pay very much to the bank, and the bank can refuse to approve the short sale. If this happens, the seller and buyer will not be able to close on the home.
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After a short sale, the seller pays what he can to the lender, and the lender is supposed to send the seller a letter forgiving the outstanding loan balance. Sometimes, however, the lender doesn't send a forgiveness letter. If the lender doesn't send any such letter, it reserves the right to sue the seller for the balance, called the deficiency. This won't affect the new buyer, as he has his own arrangement with his lender and the sale has already gone through.
If a seller can't perform a short sale because the bank doesn't approve it or doesn't have the money to pay a deficiency judgment, the seller may declare bankruptcy. Declaring bankruptcy forces the bank to suspend collection activity against the seller. In addition, if the bankruptcy goes through, the seller can wipe out most of his debts. As with deficiency judgments, this doesn't affect the buyer.