Must a Short Sale Seller Sign a Third-Party Authorization?
What This Requirement Means for Your Transaction
Question from a reader: My bank says in order for me to do a short sale, I have to send the bank a third-party authorization. What is this form and why do I need it? I have tried to search online for this answer and all of my searches bring me to your website. You sure have a lot of information about short sales. Can you tell me what a third-party authorization is and why I should sign it?
Answer: Every bank requires a third-party authorization. I haven't yet worked with a lending institution that didn't require it for a short sale. Banks might be accused of doing a lot of things in an underhanded manner — such as the robo-signing foreclosure fiasco and refusing to do loan modifications for underwater homeowners — but they will not speak to just anybody who randomly calls to inquire about your loan. That's where a third-party authorization comes in.
The Purpose of a Third-Party Authorization
The bank won't tell you this, but the purpose of a third-party authorization is to shield the bank in the event you file a lawsuit. Your bank will undoubtedly make your life a living nightmare as it finds various ways to drag out your short sale, but it will make sure it follows protocol when it comes to discussing your personal financial information with somebody else.
Below are some commonly used basic components of a third-party authorization:
- The name of the individuals noted on the mortgage documents.
- The property address, city, state and ZIP code.
- Name of the party authorized to speak to your bank (most likely your real estate agent) and contact information, including address, email and phone/fax numbers.
- Your loan number.
- Term of the authorization, from inception to termination.
- Date the authorization is signed.
- A place for your signature.
- Personal identification such as the last four digits of your Social Security number.
Where Do You Get a Third-Party Authorization?
I created my own third-party authorization for use in my Sacramento short sales. Most banks will accept the following form or a variation thereof:
"Please consider this letter written authorization to talk to my listing agents about the above loan. They have my full consent to discuss the condition of my loan with you, and to negotiate on my behalf when an offer to purchase has been executed. This authorization is valid from today's date through a date 12 months from now. I/we give my/our full consent for you to release all information regarding our loan to the following parties:"
You can also ask your real estate agent to give you his or her company's third-party authorization form. Your agent might also get this form from a local association of REALTORS®. Another option is to ask your bank for the form. Almost every bank has its own form.
Moreover, it's possible the bank might prefer its own form, so ask. If the bank gives you a preferred third-party authorization, that document might need to be notarized. In that case, you will need to go to a public notary and pay for your signature to be authenticated.
A Second Type of Third-Party Authorization
Another type of third-party authorization is a limited third-party authorization. Banks ask homeowners to sign this type of authorization when there are two loans on a short sale. The senior lender might need to talk with the junior lender about paying the junior lender a certain amount to release the loan.
The senior lender needs your permission to discuss your situation with the junior lender. That permission is evidenced best in writing. Again, your mortgage lender doesn't want you to sue them. To facilitate the short sale, junior lenders need to release their most likely worthless mortgage from your home. Most junior lenders, even if they have no security for a mortgage, will not simply release their loan without some form of compensation.
The discussion between your senior and junior mortgage lenders can be crucial to obtaining your short sale approval. It's the senior mortgage lender who will pay your junior mortgage lender pennies on the dollar from the proceeds of the sale.
Components of a Limited Third-Party Authorization
The limited third-party authorization grants your senior lender the right to communicate with your junior lender. It may also give your senior lender the right to deliver or obtain documentation from the junior lender to complete the review of your short sale. The following information is typically reflected in the document:
- Your name.
- Your senior lender's name.
- Your junior lender's name.
- Your junior lender's loan number.
- Your property address.
- The date and your signature.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.