All real estate sales transactions incur closing costs, also known as settlement fees. The amount and party responsible for the fees depends mostly on the sales terms agreed to in the original sales contract between buyer and seller. A short sale, which involves the sale of a home whose market value is lower than the balance due on the loan, may function differently when it comes time to allocate payment of closing costs.
There are two types of closing costs which must be paid at settlement: the buyer's, and seller's. In traditional, non-distressed sales, the sales contract typically stipulates that the seller will pay for necessary home repairs and his portion of closing costs. The seller can also pay most, if not all, of the buyer's portion of closing costs, depending on the negotiations. The seller typically pays for these either out of pocket or from proceeds of the sale. In a short sale, however, homes are usually sold "as-is" because the seller cannot afford repairs and makes no money from the sale proceeds.
The seller's lender in a short sale transaction has the authority to decide many important aspects of the sale. In fact, the seller needs his lender's permission to conduct a short sale in the first place. Approval depends on the buyer agreeing to certain lender conditions. A buyer might request that the seller -- in this case, the lender -- credit the buyer with a lump sum at closing to cover buyer closing costs. Such costs might include loan acquisition fees, escrow fees, title fees, reserves needed to establish an escrow impound account, pre-paid interest, property taxes and insurance premiums. The lender can credit the buyer a certain amount, typically no more than 3 percent, on behalf of the seller.
A short sale is a unique type of transaction in that a buyer can be required to pay more than his share of closing costs to close. Whether he does so, and how much, depends on his motivation to purchase the home. Because short sales are often sold at a deep discount -- typically about 25 percent lower than non-distressed sales -- the buyer can decide it is worth it to cover all necessary expenses the seller and lender are unwilling to pay for. In addition to his own closing costs, expenses might include past-due homeowner's association dues and utility bills that may or may not have been converted into a lien on title. The buyer might also pay for repairs related to termite infestation, which is required by his mortgage lender to obtain a loan; or repairs required by law, such as installing or repairing smoke detectors.
The seller cannot receive any money back at the close of escrow from a short sale, except for any seller incentive offered by his lender to cover relocation costs. As such, he might not have the funds to pay for costs neither the buyer nor lender are willing to pay. For example, overdue HOA payments can result in a lien on the property totaling thousands of dollars, which the seller will remain liable for after the close of escrow. Although property taxes are covered by the lender at closing, the seller might owe his lender a deficiency judgment and taxes on the loan balance, which is treated as income.
- Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs
- Bloomberg: Short Sales Surpass Foreclosures as Banks Agree to Deals
- Inman News: Who Pays Back Taxes on Short Sale?
- Fox Business: Risks of A Short Sale
- Washington Post: FHA Plans to Halve Mortgage Loan's 6 Percent Seller Concession This Summer
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