In today's market, short sales are a very frequent occurrence, and underwriters are becoming increasingly cautious about insuring these 'high liability' transactions. Because of the heightened sensitivity to the issue, title companies are being required to get underwriting approval before these types of transactions can be insured. In turn, title companies are requiring that they are notified immediately once it has been determined that a transaction involves a short sale. Ample notification, as well as these generic guidelines may help to prevent any unnecessary setbacks that can frustrate and disappoint clients and attorneys alike:
1. Obtain a written payoff letter from the existing lender. It must state the reduced amount and the specific conditions stipulated by the lender in order to fully satisfy the loan.
2. Follow closing instructions. Pay close attention to the existing lender's closing instructions and special conditions, if any. There can be no variation from the short lender's payoff instructions.
3. All payments, whether made at closing or outside of closing, must be disclosed on the HUD-1 Settlement Statement, and the title company must be provided with an approved copy. If the sale does not involve a new lender, a closing statement must be prepared by the buyer's attorney and signed by all parties to the transaction including all attorneys, advisors and other third parties associated with the conveyance.
4. If as a condition of sale the seller may not receive any proceeds, the underwriter will require copies of the proceeds check and an affidavit from the settlement agent, if applicable, and buyer acknowledging that the seller has not received any proceeds.
5. All junior mortgages and other liens must be satisfied and releases/discharges must be obtained. The title company must have written confirmation or actual releases/discharges/satisfactions of all junior liens. If no documentation exists, the junior lienor will remain an exception to the coverage of the policy.
6. If foreclosure proceedings have commenced, the "payoff" letter from the foreclosure attorney must state that upon tender of the amount stated in the "short" payoff letter, the attorney will discontinue the foreclosure action and discharge the Lis Pendens, with no additional fees or costs.
7. After the closing, the title company should follow up and record all satisfactions or releases, as applicable, of all mortgages and other liens.