Paying Back Taxes or Second Mortgages on a Short Sale

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Does a buyer have to worry about paying any back taxes or second mortgages on a short sale?


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An Owner’s Title Insurance Policy should insure a buyer against unpaid back taxes and liens. For that reason, the title insurance company will require that the seller’s second lien mortgage company agree to accept a short payoff or the second lien will have to be paid off at closing. All taxes that are due and payable also must be paid at closing or the title company will not insure the new owner’s title. So a buyer shouldn’t have to worry about back taxes and unpaid liens as long as the buyer receives title insurance.

The worry a buyer has with a short sale is that their purchase contract is with the seller, not the seller’s lender. In a “normal” sale the seller is not only contractually obligated to complete the sale, but additionally they are getting their equity at closing that is motivation for them to complete the sale. The seller’s lender has no choice but to accept a payoff in the amount owed.

In a short sale the seller’s lender has to agree to take less than the amount owed. They are not required to do this. They choose to do it to get more than they might if they foreclose. They are not contractually obligated to the buyer to allow the sale to take place. If at the end of the transaction the lender decides they are not getting enough payoff they can decide not to let the transaction go through. The buyer has no recourse. The buyer can decide to pay more for the property to increase the amount the lender receives, but cannot force the lender to accept less than the amount due.

This is why it is important to deal with real estate professionals that are familiar with how short sales work. If the amount that the seller’s lender is receiving at closing is less than they were expecting due to back taxes or a second lien cropping up at the end, then they might not be willing to let the transaction to through and there is nothing that a buyer can do…except pay more for the property.

Answered over 5 years ago
Harlan Cooper
679 3

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