Among the many twists and turns a short sale can take during its relatively incessant and torturous life is the often anomalous ending. It ain't over until the fat lady sings. Trying to second-guess the bank's investor guidelines is a crap shoot, but I try to prepare my Sacramento short sale sellers for the unexpected that could materialize upon approval.
I'm finding that second lenders are demanding more of the net proceeds. They don't care who pays them -- the seller, the buyer, the agents. I suppose some figure that their position was 20% of the equation in the first place. So, why should they get the short end of the stick (a measly $3,000) upon payoff? Sellers are often called upon to make a seller contribution to the second lender, especially if that loan was hard money.
But in a strange twist lately, some lenders are demanding a seller contribution in purchase-money situations. In California, purchase-money loans are not subject to a deficiency judgment. This means if the bank loses money, whether through foreclosure or a short sale, if the loan was originally given to the sellers to buy the home, the bank can't go after the sellers. These homeowners are exempt from collection attempts.
At the moment, I have several short sales in which the banks have put forth requests for seller contributions on purchase money mortgages. The way one negotiator put it, the bank's investors want to see some money on the table. It's possible, I suppose, that the PSA would receive compensation through a foreclosure, which could be one reason it's not overly eager to approve the short sale unless the loss is mitigated. In one short sale, the seller is taking an advance on salary to meet the demand because the seller has tapped all other credit options. Overall, whether to contribute is the seller's choice to make.
The seller could walk away and say forget it. There is very little incentive for a seller to comply. Short sales in California are contingent upon the seller's approval of the bank's short sale approval letter. If the seller doesn't agree with the terms and conditions contained in that approval letter, the seller is generally free to cancel the transaction.
However, I've not yet had a seller refuse to meet the bank's demands. I suppose that's because short sale sellers generally want to do the "right thing," which is why they are pursuing a short sale in the first place. They feel responsible. They want to put the ordeal behind them. They don't want a foreclosure on their credit report.
The moral is don't rely on the fact that because your loan is purchase money you'll skate through to closing without a seller contribution. Moreover, get legal and tax advice before pursuing a short sale.