What is Contained in a Short Sale Approval Letter?
Today's question is what is contained in a short sale approval letter?
We're going to be discussing the basic elements that you should keep an eye out for when reviewing your short sale approval.
The approval letter.
The approval letter itself will contain some basic information about your loan and about the terms and conditions of the approval letter. Specifically, with respect to the loan, it'll set forth the loan amount, the total principal mortgage balance, along with the amount in arrears, any sort of fees or penalties that have accrued, as well as the net proceeds from the real estate transaction after costs, commissions, subordinate lien holders are paid off.
Furthermore, the approval letter will contain information about the terms and conditions of the approval itself. Specifically it should address the lien, as well as any deficiency balance. Now, this is a very important distinction. You've got a lien, and you've got the underlying obligation to pay. Washington state is a deed of trust state, which means that there are essentially two documents that go into any mortgage.
First, you have the loan itself, the promissory note.
Which is an obligation or a promise to repay the loan amount. Second, you've got a deed of trust. The deed of trust is the document that secures, that acts as security for that loan. Basically the deed of trust puts your house up for collateral in the event that you default on that mortgage debt. So the bank has the authority to foreclose on that deed of trust, or the deed of trust, rather, grants the bank the authority to foreclose on its lien on title in order to repay that loan.
As it relates to a short sale approval letter.
You want to make sure that the terms in that approval, that the language specifically addresses not only the deed of trust, right, the lien on title, but also the underlying obligation to pay. Now, most every approval letter will contain terms which specifically address the lien on title, meaning that the language in the approval will release or remove the lien from title, thus allowing the transaction to close.
You can't sell a property that has a lien on title. It doesn't have what we call "marketable title." It's not salable. So before you can move to closing, you have to release that lien, and in almost every instance, the bank will release the lien in exchange for the net proceeds of that real estate transaction, in exchange for the proceeds of the short sale. But that's just one piece of the puzzle, right? You've got the lien release, which is great. You need that in order to move to closing. However, what about the underlying obligation to pay pursuant to the promissory note? What do we do about that?
In the event that the approval letter doesn't specifically address how the deficiency balance is to be dealt with after the net proceeds are applied to the mortgage.
If you find yourself in a situation where you could potentially be exposed to liability down the road. And that's why it's so critically important that your approval letter contains language specifically addressing how the deficiency balance will be dealt with following the real estate transaction.
You want to make sure that the bank expressly waives its right to collect a deficiency balance following the short sale.
Meaning that they give up their right to pursue the borrower for any remaining balance, effectively writing off that debt and forgiving the borrower any amount owing after the sale closes. Again, if the approval letter remains silent on how deficiency balance is to be addressed, then you're potentially opening yourself up for exposure to liability down the road.
By remaining silent in the approval letter, the bank is effectively preserving or retaining its right to pursue you, the borrower, for the deficiency balance after the sale. And believe me when I tell you, you don't want to find yourself in a position where you're personally liable for the deficiency balance following the short sale.
You don't want to be on the hook for any remaining debt after the sale closes.
And that's why it's so critically important that you have a team of professionals who review your documents and make sure that the documents contain all of the requisite language. What we're looking for is a lien release, in addition to a deficiency waiver, right, a full deficiency waiver, settlement in full and final satisfaction, so that you aren't personally liable for any remaining debt after the transaction closes.
And these are just a few of the things that you should keep an eye out for when reviewing the approval letter. If you have any questions or concerns, please don't hesitate to reach out to Ark Law Group. We're always happy to help.