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Claims Corner

Short Sales

Short Sale Payoff Letters: What They Should and Should Not Contain

The current state of the housing market has left many mortgagors upside down on their mortgages. As a result, title agents are increasingly likely to take part in closings involving a short sale payoff. In a short sale, the seller/seller's agent who cannot pay the full balance of the mortgage from the proceeds of the sale of the property negotiates with the lender to accept less than the full amount of the balance owed. These often lengthy negotiations are always contingent on meeting a multitude of conditions. Sometimes a transaction involves more than one mortgage with a short sale payoff. Short sale payoff letters are often very detailed, moreso than a typical payoff letter.

It is imperative that ATG agents always read short sale payoff letters carefully. Never close on short sale payoff letters that are not current. Recently, ATG has seen short sale payoff letters that indicate that the short sale lender may void the conveyance after the closing for any reason. ATG will not allow a transaction to close until such language is removed from the payoff letter.

We have also seen short sale payoff letters that require notification of the short sale lender of any conveyance that occurs within 30 days of the closing. Some of these letters allow the lender to void the payoff if the buyer sells the property within a short period of time. These are obviously unacceptable. Sometimes ATG is able to resolve the issue with the lender or minimize the risk enough to allow the transaction to close. ATG members should clear title matters in the short sale payoff letter with an ATG underwriter prior to the closing.

Short sale payoff letters often require that the lender be provided with certain executed documents and copies of other documents from the closing. Please make sure all requirements are met before or during the closing. It is more difficult to get documents from the seller after the closing.

Due to the many conditions short sale payoff letters typically contain, ATG requires that the lender sign all HUD-1s for short sale transactions. Then if the lender comes back after the closing and indicates that the money went to the wrong party, ATG has the signed HUD-1 to show that the lender signed off on the disbursement. In the past when ATG has been presented with such an argument by a lender, showing the lender the signed HUD-1 resolved the issue. Some lenders refuse to sign the HUD-1 under any circumstances. When dealing with such a lender, ATG requests that you note on the HUD-1 the name and phone number of the person who verified the short sale payoff letter during the closing.

ATG members involved in a short sale where more than one lender is accepting a short sale payoff must meet the requirements of all the lenders and resolve any inconsistencies in the short sale payoff letters prior to disbursement.

Some short sale lenders require funds via wire transfer while some require a cashier's check. Please make sure to collect the appropriate fees (i.e., wire fee, fee to obtain a cashier's check) at the closing so the payoff can be made in accordance with the short sale payoff letter.

If you have any questions regarding a short sale payoff, please contact the ATG Underwriting Department, legal@atgf.com, 217.403.0020, or 312.752.1990 or the ATG Disbursement Accounting Department,Chi_DisbAcct@atgf.com, 312.752.1995.