Who Pays Closing Costs in a Short Sale?

Navigating through a short sale is a rough process, taking time, patience and the negotiating talents of a qualified short sale specialist. Most short sales that conclude are to the benefit of the seller, the owner of record. The lender holding the mortgage covers the cost of the sale, with the seller often walking away with little or no investment in the closing. Some sellers may even leave the closing table with money in their pocket.

Most purchase contracts state what costs the owner of the property incurs at closing, including title insurance, taxes and document stamps. In a short sale purchase contract, the terms are the same as written, but in actuality the lender pays these costs, plus the real estate fees. If the lender foreclosed on the property and took title, it would have to pay these fees when it sells. Knowing the seller doesn’t have the funds to pay this, the lender agrees to cover them and avoid the more costly foreclosure process.

If the comparables submitted by your certified short sale real estate specialist indicate that the price offered on your house is under market, and includes a closing cost stipulation, your lender will more than likely reject the purchase contract, moving you closer to foreclosure. If closing costs are to be included in the purchase price, be sure your agent negotiates a selling price that gives the mortgage lender a payoff it can work with -- usually asking price plus the 3 percent typically offered as closing costs. Many lenders, seeing that the underwater seller is trying to get the best price for the property, will offer the seller cash at closing to help cover his relocation expenses.

If, in the course of researching an owner’s financial hardship, the lender uncovers funds that are available after expenses are calculated, the lender may request that the seller contribute to the closing costs in return for an approval of the short sale.

When an owner has recently refinanced his mortgage and received cash from equity, the lender may require that the owner contribute to the closing costs. The lender may use this as leverage to convince the seller to proceed with the short sale rather than moving ahead with a foreclosure, leaving the seller with credit damage that is more substantial than a short sale.

If a title search reveals liens on the property incurred by the seller, the lender will insist the seller pay these costs at closing. Mechanics liens, judgment liens and even outstanding homeowners association – HOA -- fees are included in this group. The HOA may be in a position to negotiate the past due fees, reducing the cost to the seller. Some lenders will agree to pay these costs.