How do you bring cash to a closing?
April 27, 2011 9:29 AM   Subscribe

How does selling an under water house where you bring cash to the closing actually work? What happens if you come up short?

Selling due to divorce in San José, California, USA. House is on market at a price that would be "above water" after broker fees and mortgage + HELOC paid off, but it's been two months and I doubt it will sell at a price that breaks even or better.

It might sell with us only needing to pay a few $thousand though. Will the bank even allow us to accept an offer and open escrow that puts us in the red? I've read of "bringing cash to the closing" as a simpler alternative to a short sale, but I've never heard of this actually happening.

Let's say we're supposed to bring $5k, but we come up $1k short. Can we just keep escrow open a bit longer, set a new date & try again, assuming the buyer doesn't decide to pull out? My understanding is that closing is a time when a bunch of things happen at once including the current lien holders being paid off and releasing their liens so coming up short would mean they wouldn't want to release and a new mortgager wouldn't want a lien attached (other than theirs).
posted by morganw to Work & Money (7 answers total) 1 user marked this as a favorite
Best answer: I sold a house (also as a result of a divorce) and lost $. The sales price was sufficient to pay off the mortgage, but not enough to pay realtor fees, or the personal loan from my parents for the original down payment/closing costs. My ex and I agreed on a way to split the debt to my parents, and he showed up at closing with a check for $1,500 or so to cover the difference between the sale price and the mortgage payoff+fees+realtor costs.

Does the bank holding your HELOC hold your mortgage as well? The HELOC debt is (should be) secured by your home equity, but it looks like HELOCs are subordinate to the mortgage loan, and the HELOC bank has recourse to pursue you personally for any HELOC debt remaining after the sale (source). The bank will definitely care if you want to sell the house for less than the mortgage balance (that would be a short sale), but if the sales price is less than needed to cover the HELOC and/or broker fees, the mortgage-holder is still covered. You, of course, will still need to pay those debts/fees, however-- that's the cash you'd have to bring to closing.

You should probably talk to the bank that holds your HELOC. If you end up with a situation where you've got a sale that covers your mortgage and fees, and leaves you with enough to pay some (but not all) of your HELOC, you may be able to convert the remaining balance into another type of debt and divide it between your ex and yourself (according to your divorce agreement). This is certainly something that the HELOC bank has dealt with before, and they should have someone who can point you in the right direction.

You do not want to get yourself into a situation where you can't do whatever you need to close the sale. If the sale falls through as a result of something you do or fail to do, you'll lose your earnest money, which would probably be a few thousand dollars. At least in Oregon, both the buyer and the seller put up earnest money when the contract is signed, and that money either goes towards closing costs or may be forfeit if you break contract, including not closing on the agreed-upon closing date.
posted by Kpele at 10:19 AM on April 27, 2011

If you are in a "bring cash to the closing" situation, then your bank should not really care. They are being paid in full and would have no reason to object. The BUYER'S mortgage lender might want assurances that you can complete the transaction and the seller's failure to be able to deliver the property can give the buyer the ability to walk away from the transaction without forfeiting their earnest money. There are probably provisions in the purchase contract that cover these contingencies; check with the person who's providing / drafting the contract.

Logistically, if the purchase price is insufficient to cover the closing costs and the seller is providing the shortfall, the seller would simply pay the funds into escrow (wire transfer, certified check, etc.) just like the buyer would normally provide funds into escrow at closing.

I think it would be an odd situation where a HELOC lender would agree to take its secured debt and convert it into unsecured personal debt, but I suppose stranger things have happened. I think the transaction costs of getting a bank to accept substitute collateral would quickly eclipse the few thousand you think you might be short.

I have no experience in this situation, but I would suspect that the seller's lenders (both primary and HELOC) would have zip zilch zero incentive to turn this into a short sale situation. Having the lenders shave a few thousand off the payoff price is probably just as complicated as a full-blown short sale.

I think what you're really asking is about more time to check your couch cushions for the needed funds, or shaking down the various service providers to take a haircut, or even for the buyer to accept a lower price so the sale can go through. My understanding is that you can keep escrow open as long as you want until someone (usually a lender or one of the parties) spooks, but let's be clear what that tactic is -- it's a shakedown for who's gonna cough up the needed funds, with all the brinksmanship commonly attached to those tactics. You'd have to check the purchase contract and fee schedules with the escrow agent.

posted by QuantumMeruit at 10:40 AM on April 27, 2011

Best answer: After my divorce, I sold the shared house and had to literally bring a check (~US$10k) to closing.

There was lots of pre-closing confirmation that I actually had the money to bring. After that I showed up, handed over the check, signed the papers and was done.
posted by unixrat at 11:00 AM on April 27, 2011

Response by poster: > The bank will definitely care if you want to sell the house for less than the mortgage balance (that would be a short sale)

and the answer to that seems to be

> There was lots of pre-closing confirmation that I actually had the money to bring.

which makes a lot of sense. Is it really a short sale, though, if we want to sell upside down, but we aren't asking the bank to take a haircut on the principle, but are paying the difference with cash?

The HELOC is a different bank: Wells Fargo has the 1st which is a regular 80/20 fixed. Addison Avenue Federal Credit Union has the HELOC which paid 5% so could only pay 15% down and not pay PMI. Addison was a little sticky when we refinanced the 1st from one with a higher rate and an interest-only feature, making us pay a few thousand.
posted by morganw at 1:23 PM on April 27, 2011

We had a ~193K mortgage and an offer of ~175K that was the only real offer we'd seen in a year of the house being on the market. At settlement, we had to wire a bunch of money to the title agency that was handling the closing. It wasn't a problem.

(I don't even remember if there was lots of pre-closing confirmation, actually---we borrowed some of the money that we wired from my parents, and that wasn't a problem. So, a couple days before closing, they wired us the money, and then we wired money to the title agency.)

Oh, and we were doing this entire sale from 4000 miles away, since we'd moved.
posted by leahwrenn at 2:14 PM on April 27, 2011

Best answer: I think there might be confusion over terminology here.

"short sale" = sale of the property for less than the amount of the mortgage, with the lender accepting the smaller amount. The lender has an incentive to accept a short sale if, after transaction costs, the amount they'd get from the short sale is greater than what they'd receive in foreclosure. In a short sale, the bank takes a "loss" on their mortgage; they are releasing their mortgage after accepting a less-than-full payment on the mortgage.

"bring cash to the closing" = you are paying off the lenders IN FULL. The sale price might be less than the mortgages + the transaction costs, and you (the seller) are making up the difference out of your own pocket. Usually, if as the seller you are bringing cash to the closing, the mortgage lenders are being paid off in full.

In a normal, non-short sale closing, both the first mortgage lender (in your case, Wells Fargo) and the HELOC lender (Addison) would be paid off in full out of escrow. The lenders release their mortgage on the property when they get paid (in full).

If you're bringing cash to the closing, the lenders are still being paid in full. It's just that the difference is coming out of the seller's pocket.
posted by QuantumMeruit at 4:49 PM on April 27, 2011

"A Closing" is just an accounting for and paying off of all the various people. So the bank that holds the mortgage is going there simply to exchange the deed for what they are owed. They don't care where it is coming from. That is your problem, as the guy who owes the bank.
posted by gjc at 5:32 PM on April 27, 2011

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