The Top 3 Things Every Seller Should Do Before Accepting A Bank Approval Letter!
The outcome of a short sale for a homeowner is primarily based on the terms and conditions the bank agrees to for the short payoff. The short sale bank approval letter is an extremely important document because it outlines these terms and conditions for the seller. Not all bank approval letters are the same. This document should be read through carefully in order to know how the bank intends to pursue the borrower after the transaction takes place.
1. Read & Review The Approval Letter Language Carefully
Bank approval letters are typically 2 to 5 pages in length, but the most important items in the letter for the homeowner/seller can be found in just a couple of sentences. The language used in the letter by the bank will describe how it will handle the “loss”, or, “short payoff balance”, owned by the seller. Every bank has a different way stating this so there is no one single way this language may be spelled out.
The term “lien release” is typical in many approval letters. A lien release is just what it means, a release of lien. This is saying the bank will release it’s lien on the property. Sounds good that they will release the lien for the short sale, right? The answer is NO, the real question should be what is the bank going to do with the LOSS? This should be the primary concern for the homeowner/seller.
Terminology in bank approval letters dealing with how the bank intends to handle the loss include, but not limited too….
a. “will not pursue the customer for the remainder of debt”
b. “will release/waive it’s right to collect any judgment/deficiency”
c. “file a 1099c to the IRS…”
Therefore, the seller’s main concern on a bank approval letter should be identifying how the loss will be handled. It is extremely important not to make any assumptions on what the bank may or may not do with the loss. Finally, the Federal Trade Commission, FTC, announced new regulations in January 2011 that make it mandatory for any Realtors or Short Sale Negotiators make the following disclosure to any seller/homeowner pursuing a short when the bank approval letter is issued. Here is an example of the FTC Disclosure.
“This is an offer of mortgage assistance (short sale approval) we obtained from your lender(s) or servicer(s). You may accept or reject the offer. If you reject the offer, you do not have to pay us a fee for our short sale negotiation services. However, you may be obligated to pay us a commission for our real estate brokerage services if the short sale approval was acceptable to the buyer.”
“Attached is a notice (if any) from your lender or servicer that describes all the material differences between the terms, conditions, and limitations associated with your current mortgage loan and the terms, conditions, and limitations associated with your mortgage loan if you accept your lender’s or servicer’s offer.”
The language in these bank approval letters is extremely important for seller/homeowners to understand. Make sure you discuss this topic with whomever you use to assist you in negotiating your short sale before the process has even started!
2. Implications To Your Credit
Most banks will report the short sale to the credit bureaus and they state this in most approval letters. Typically, banks will report the short sale has “paid in full for less than full balance”, or, “account settled for less than full balance”. Every bank is different in the terminology they use but it conveys the same message, which is, the account was not paid off in full.
Every seller/homeowner should know the credit implications before the short sale even begins. What is more difficult to calculate is how much of a point drop in credit score the short sale can have. There is typically no way to get around the bank not reporting this to the credit agencies unless you pay off the full amount. It has been standard operating procedure for the banks to do this on most short sales.
3. Accept or Reject
In a short sale transaction, the seller/homeowner, has the power to accept or reject the terms of the approval letter set forth by the bank. This doesn’t mean the bank will change it’s standpoint either if the short sale approval is rejected by the seller because of any conditions. Every short sale real estate contract should always be written “subject to third party approval”, and “to terms acceptable by the seller”.
This is also another feature in the new FTC regulation from January 2011. The seller/homeowner should never feel pressured to simply just accept a short sale approval letter. If the terms are unacceptable the seller may simply reject it, and pursue another avenue of preventing the foreclosure if they wish. Most importantly, it’s the seller’s choice to make, not the agents or negotiators.