Ginny… Our closing day is next week for a resale home. But today, my closing attorney informed us that two days after our closing day, the house is going into foreclosure. The seller has hidden from us (and from his own agent) the fact that the payments on the home are more than six months past due!
Can I terminate the contract because the seller has lied? We don’t want to get into a big mess with the bank — that’s why we didn’t want to buy a short sale or a foreclosure home in the first place. Is it too late to terminate? Darla G., Oyster Bay, NY
Darla…Here’s my advice:
1. It’s your closing/title attorney’s job to detect these sorts of issues. Your title attorney has done his job well; he is tasked with doing a search of all title matters — including mortgages and liens — and ensuring that that title is clear at closing. Clear title means all mortgages paid off and liens removed, so that you are able to take title and obtain title insurance at time of closing.
It’s your title attorney’s job to obtain a payoff statement from the seller’s mortgage lender(s) and determine whether the sales price is sufficient to pay the loan off entirely, which will release any interest the mortgage holder has on the property and allow it to be transferred to you.
Foreclosure is a process that is currently taking banks an average of about two years to complete. There are various stages of the process, from notice of default, to notice of foreclosure sale, to actual foreclosure and then repossession of the home.
It’s not clear from your question whether your attorney’s comment that the home is going into foreclosure means that the property is just receiving a particular notice or has actually received all the notices and is set to be foreclosed — the property auctioned off or its title transferred from the seller back to the bank — on that particular date.
You should ask for clarity on what, specifically, the closing attorney means, and what, if any, implications of this information are for you, if you close on time.
2. The seller might not have “lied,” per se. The seller is responsible only to tell you things that would impact a reasonable buyer’s decision to buy the home. If the seller (a) believed, from the terms of your contract, that the sale would close prior to the house being foreclosed, and (b) believed, from the terms of your contract, that the mortgage would be entirely paid off by your purchase money (and/or money the seller plans to contribute), then there might not have been a reason to disclose a pending action to you.
The seller’s whole point of selling to you at the time and on the terms you agreed to was very likely to avoid his or her home becoming a short sale or a foreclosure — see point 3, below, to understand more precisely what I mean.
If an on-time close of your escrow does that, then you are really not in a worse position — besides the anxiety and irritation factor — now than you were before you knew the seller was on the brink of a mortgage disaster.
If the mortgage cannot be paid off at closing by the funds that are set to be brought to the closing table, though, then the transaction would become a short sale.
These are the transactions you’ve heard about, where the seller’s bank can take months and months on end to decide whether to green-light the deal and can (and often does) come back and ask for more money from either or both the buyer and the seller.
If that’s the case, and the seller failed to disclose that the property was a short sale, you absolutely do have the right — and a very legitimate reason — to kill the deal. If your home’s seller would withhold that very critical piece of information for your decision-making, you should be concerned about what else the seller might have withheld.
3. If you close the deal, that will cancel the foreclosure. Assuming that your purchase money (and any funds the seller is bringing to closing) exceeds the balance of all mortgages and liens, closing the purchase of the property on time should prevent the foreclosure — and should prevent you from having to experience any sort of messy entanglement with the seller’s bank.
This is where it’s uber-important to be in close communication with your attorney; if he can vouch that clear title can be transferred at closing on the existing terms of the deal, there’s really no way in which this new information about the seller’s default status changes your position or expected outcome of the transaction.
It might be a bit more work for the attorney to ensure that things are 100 percent copacetic, with no wiggle room for delays, but you should be able to get title insurance, take title, get your keys and do everything else as planned — assuming you close on time.
Check with your mortgage broker and the attorney to see how certain they are the transaction could actually close on time. Given that you’ve come this far on this property, I would avoid jumping to the conclusion that your attorney’s comment means you should undo the deal unless and until you receive information to the effect that the seller’s mortgage delinquency will change the timeline or the price you’ve already agreed to.
If or when you do receive such information, though, that’s an entirely different story, and you should aggressively consult with your real estate agent and your attorney about how you should proceed in terms of canceling the transaction.