Short Sale Lien Holder wants our escrow refund to be applied to our principle

We closed on our short sale house this last Friday, December 28th and moved in that day. Yesterday we received a notice from the title company that the short sale lien holder (Wells Fargo, FHA loan) will not allow the extra money we have in escrow to be refunded directly to us. Instead they will only allow that the money be applied to our mortgage principle. The title company is basically saying that the short sale lien holder can unwind the transaction at this point if we do not agree.

It is not much money but the idea that the sellers lien holder has ANY right to dictate where MY money goes is baffling to me. All the terms of the contract have been completed and there is nothing that I can find that says they have the right to dictate where my money goes. Also, it sets a bad precedent because it tells future buyers of short sale home to put as little earnest money down as possible otherwise the short sale bank can force any refund to be applied to the balance of your loan. If I had less earnest money and brought money to closing then they wouldn't ask for me to put extra money towards my own principle. That is basically what they are asking me to do. The entire process is just wacky that they can ask me to do something with money that is not theirs and the result of what they are asking does not even benefit them. 

I am an insurance underwriter and in insurance we apply the rule of insurable interest. You cannot insure something without having an insurable interest (otherwise you would be gambling that something unfortunate will happen to someone and then seek to gain from that). I do not see that the lien holder has any interest in my extra money in escrow and I do not think they have any right to tell us what to do with it. 

I have filed a complaint with our state AG (WA state), emailed my representatives and emailed some other folks but wanted to get the advice from this forum. 

PS - I have read a lot of advice on this forum and it has been invaluable to me throughout both of our short sales. The first one was a dud and I saw a lot of red flags which led us to pull out. I believe at times I knew more about the short sale process from what I read on here than my own real estate agent or the sellers agent. 

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Not sure if understand what you are saying. Your escrow funds should be applied to the purchase price at time of closing. There shouldn't be any excess escrow.

Now lenders do require the borrower (seller) to give up their escrow funds. But this is referring to the funds the lender has in escrow on behalf of the borrower for taxes and insurance.

The lender has zero authority to put any claim against your escrow.

It sounds like there is a misunderstanding somewhere. I would ask to see in writing exactly what the closer is referring to. I think you will find that they are making a mistake and that the lender is just asking the borrower to sign a form related to their escrow.

Feel free to forward me what you get and I'll take a look at it. [email protected]

Thanks for the response. Everyone involved has been super quiet ever since I informed them that I am taking this to the AG and every one else. My guess is this is a mistake and hopefully someone will admit to it and do the right thing. 

So far the only thing I have is an email from the title company indicating that the money that was supposed to be refunded to me as indicated in the HUD-1 form will not because of the sellers lien holder's request that it be applied to my principle balance. It is Wells Fargo so perhaps the processor there has no idea what they are requesting and the title company just does what they are told without thinking. 

Hi Joseph. WF will not allow you to walk with cash at closing. That's a different issue than keeping your deposit. So the deposit should be applied to the purchase price or used for other closing costs.

Are you bringing any cash at all to closing or are you financing 100% with costs included?

I have an FHA loan with a Home Advantage Loan for the down (zero percent interest) and Wells Fargo agreed to pay $5,500 towards closing. I put $2K towards earnest money and because of that I should have received approx $550 back at closing. WF is saying that I cannot get that money back but it should be applied towards my loan principle. It makes no sense and I do not see how they have any legal right to tell me what to do with my money. If I only paid $1,000 for earnest and paid $450 at closing then they cannot ask me to apply money in my checking towards my principle. I don't see how this is any different. 

Can you explain to me how they can do this? And how does this help the home owner community or WF? All it does is tell short sale buyers to only use as little earnest money as possible. I could have easily only put down $1,000 but was never told of something like this could happen. 

Ok that makes sense Joseph. The investor probably has a guideline that states "neither seller or buyer will receive any funds at closing." The short sale lender is taking this literally instead of logically.

One solution would be for the seller and buyer to both sign an escrow release and addendum releasing $550 of the deposit back to the buyer. This would require the HUD statement being changed to reflect a deposit of $1,450 instead of the $2,000. This is needed since the $550 is no longer funds that are a part of the closing. The new HUD would need to be approved by the short sale lender and by your lender.

Or...you could request an exception to the investor guideline. Just provide a letter from your lender explaining why there is an overage and where the funds are coming from. This may require a week or more.

Or....close the deal. Apply the money to your principal. This will slightly lower your payment and save you $1,000 in interest over the life of the loan. Enjoy your new home and be one of the successful short sale buyers.

Only you know what's best for you and your family.

We have already closed. The title company recorded with the county last Friday (12/28/12) and this is happening after we have already moved in. What they are indicating is similiar to your #3 solution except that they are saying it will not lower the payment but instead will be applied like an extra payment and lessen the length of the loan. What I still do not understand is they are still giving me back my money (applying it to my loan) but applying their own rules to my money. 

I have basically instructed the title company indicating that I disagree with how this entire thing has been handled but I feel I have no choice at this point in time. I have notified my states attorney general and my state representative about the situation and I have emailed Freddie Mac asking if I have anything i can do on my end. 

What is the most frustrating thing to me is that I feel they shouldn't have any say over what I do with my money. How can they basically give the money back but insist on what I do with it? Also, my real estate agent never advised that this is a possibility and stated we will get money back when we decided to place a slightly larger amount down for earnest money. I have no question that we could have easily put down $1K and our offer would have been accepted and this entire ordeal would have been avoided. We plan on living in our new to us house for a very long time so this is spilled milk at this point. 

I guess the last question would be can the short sale lien holder really back out of the deal at this point with us being the recorded owners and living in the house??

Joseph,
Bryant is right about the mechanics of how it happened. Your agent let you make a mistake, which may have not been anticipated. This wouldn't be an issue with a non short sale. The CASH pay out restriction is an attempt to prevent fraud and abuses that have happened in the past. And YOU are right, it really is just spilled milk at this point. And, that $ 550 now will save multiple payments on the back end. There's nothing devious going on here. Enjoy your house!

I'm going for option #4 and complaining to every government institution I possibly can think of so hopefully something like this does not occur again and posting on here hopefully helps others involved in short sales. I have submitted complaints to the WA attorney general, my representatives and the CFPB (Consumer Financial Protection Bureau). 

The other shady part of this deal was that we paid for the appraisal up front and then during closing I noticed an extra $100 was tacked on. I do not see how they can possibly tack on retroactively for services I have already paid for and received but my lending officer made it seem like that was not unusual. I would think after all of the mess the housing markets have been in that these types of practices would end but instead it seems like they continue to go on. 

I will post any update to the matter but I do not have my hopes up that this will resolve itself. 

That's how I see it as well. This "should" have been caught with the tentative HUD and prior to the Final HUD by your mortgage loan rep. The bank, WF, is afraid of being red-flagged and wants no Gov. magnifier lenses looking over their shoulder. They wish to abide by all the Gov. rules and regs - which means, no cash back to either party. They are trying to avoid trouble. As the posts above suggest, this is an easy fix, but it's your call. No-one can change the Final HUD without signatures. So, if you do not agree to it being applied elsewhere, WF is opening themselves up to Gov. violations, fraud, etc. And, personally, I do not think they'd risk that for even one dollar, never mind $550 or whatever the amount.

Look in your "Short Sale Addendum to Purchase Agreement". There is normally a statement "Neither Buyer or Seller can receive proceeds from this transaction" or words similar. Sometimes FHA, Fannie or Freddie will allow Buyer's assistance up to an amount, say $3000. If Buyer needs $2750 the Buyer will not be able to receive the $250 remaining allowance as proceeds of the sale.

 

Hope this helps.

I agree with Ron Scribner.

Your complaint is with the title insurance company listed on your HUD1 under buyers title insurance, write a complaint, show it to the closing agent first and watch this issue resolve itself almost instantly.

Additionally this may be covered under the title company's E&O policy which is for covering their "errors and ommissions'.

Technically you are not losing any money however complaints only work if those are delivered to the right parties. The WA AG is NOT the party that can get you any relief over this. As soon as they see only $550 issue your complaint hits the shredder faster than it took you to write the complaint.

You could also apply heat to your loan officer and their closing department for approving an erroneous and innacurate final HUD1.

I agree - the loan officer and their closing dept are the one's who made the mistake, not necessarily the RE Agent. The buyer's RE agent, assuming it's a double end, is not the list agent, and, therefore, would not be privy, or have access, to the tentative HUDs flying back and forth with the third party lender. Your loan officer "should" have caught it.

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