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If PMI Demands a Cash Contribution From a Seller in a Short Sale, Can Anyone Contribute?

Ross Kilburn - Monday, July 09, 2012

Occasionally in a short sale, the lender or private mortgage insurance, (PMI) will require that the seller make a cash contribution in order to approve the short sale. In a way, it's sort of a token "shared sacrifice" as the amount is usually pretty small. The lender or PMI may be taking a loss of $100,000 or more, and the seller may not have made payments in over a year. Therefore, the lender or PMI feels that the seller should have some cash to contribute to get the short sale done.

For example, in a reasonable situation, the contract sales price might be $200,000 and the required seller contribution is $2,000.

While that sounds reasonable, in many short sale situations where the hardship is unemployment, or a medical emergency, even $2,000 may be too much to ask. In these situations, the buyer or the real estate brokers would be the likely individuals who would contribute to the $2,000 and make the payment on behalf of the seller, as they both stand to benefit from the short sale closing.

There is a potential snag in this situation though.

  1. If the short sale approval letter says that it is a cash contribution from the seller, can other parties contribute?
  2. And if they can contribute, how is it supposed to show on the HUD?

In a recent case with Wells Fargo, we posed that question to the short sale negotiator. Here was the reply from Jacinda, the Liquidation Negotiator: "The sellers can get the money from someone else but it has to be shown on the HUD as coming from the sellers."

Great! The buyer or brokers can contribute. But wait! It has to show on the HUD as coming from the seller? That would be RESPA fraud. You can't state that the money is coming from the seller when it is actually coming from the buyer!

I may be acting surprised, but in reality, this is what homeowners face every day. The lenders like Wells Fargo, or Chase, or Bank of America make the rules. They may not make sense, they may not be legal, they may be harmful, but they are required. You either jump through their hoops, or you don't make it to the finish line.


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