Seller Contributions
In A Short Sale
Updated 11/2010
We are seeing more and more lenders this year asking for either a cash contribution or a new promissory note if they feel that the homeowner does not have a strong enough hardship and has the ability to make a financial contribution.
Because homeowners have not been expecting to make a financial contribution, even if they can, here is the issue we have been running into: The lender will ask for a cash contribution or new note. The homeowner’s answer is either no, or if the homeowner will contribute to show good faith, it is usually a number that will offend the lender. Then the lender declines the short sale.
How does the lender decide what the contribution will be?
Typically the lender will expect up to 30% of their loss. For example if the bank is writing off $50,000 then they will want a note for $15,000. We are seeing promissory notes between $10,000 -$20,000, 0% payable over a 5, 10 or 15 year period. Occasionally they will add an interest rate, however we have only seen that once this year. (So, for a $15,000 contribution over a 15 year period, the owner would be paying approx. $84/month.)
Can this be negotiated down?
It depends on the situation. If the homeowner’s hardship is not that strong, they have money in the bank and assets showing an ability to contribute, and then there is a high probability that the homeowner will have to contribute something to show good faith and close the deal.
If the homeowner is right on the edge, then it may be negotiable. We have successfully reduced the amount requested by the bank in both of these cases; however banks are getting tougher with their guidelines.
The times we do not see contributions countered by lenders is when we have a traditional short sale with a true hardship a) insolvency b) change in income, and c) financials are showing NO ability to contribute.
The other key is to have the right offer. If the seller’s offer is between 90-95% of what is owed on the property, it may lessen the chance that the lender will ask for a contribution.
How does it help a homeowner to contribute?
If a homeowner has the ability to show some good faith it gives them more of a chance to be released from the full liability of the note! In other words they will not be pursued for deficiency judgment.
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