Unless the bank has agreed upfront to accept a short sale, which is rare, no one knows for certain -- not the buyer's agent, not the listing agent nor the seller -- if a short sale offer will be accepted or rejected by the bank. Simply because a listing is advertised as a short sale does not mean it is a short sale. It means the listing agent and seller hope it will sell as a short sale and the bank will take the offer.
Short Sale List Prices
The list price of a short sale home generally has very little bearing on the actual price a bank may accept. The list price may be too high to attract an offer or too low for the bank to accept. Some agents advertise short sales at unbelievable prices, in hopes a buyer will be enticed to submit an offer. Moreover, just because the seller may accept the offer does not mean the bank will agree to take a short sale.
Short Sale Definition
Short sales happen when a bank agrees to accept less than the amount of the mortgage the seller owes to the bank. The property may be encumbered by two loans or one loan. If it has two loans, both lenders must agree to accept a short sale.
Why Banks Reject Short Sales
Banks demand a plethora of documentation before approving a short sale. Contrary to popular belief, sellers do not need to be in foreclosure or have fallen behind in making mortgage payments, for a short sale to occur. Here are reasons that banks turn down short sale requests:
- Short Sale Offer Price is Too Low
Banks will request an appraisal, sometimes several appraisals, and may also order a BPO. When the listing agent submits the short sale offer, the agent should also include a comparative market analysis that justifies the price in the short sale offer. If the bank believes it can make more money by taking the property through foreclosure proceedings, the bank will reject the offer.
Tip: Be prepared to argue with a rejection and show comparable sales that support the short sale offer price.
- The Short Sale Package is Incomplete
Ask any short sale specialist and you'll hear horror stories of how banks lose documentation. In some cases, it doesn't matter how many times the package is expressed overnight or faxed, the bank might misplace it. Worse, an important document might not be in the file, and without every single required document, the sale will not be granted.
Tip: Ask the bank for a list of documents, make copies, and send complete packages.
- The Seller Does Not Qualify
If the seller is asking for debt forgiveness, the bank will want to see a hardship letter from the seller that explains why the seller cannot afford to pay back the shortfall difference. Sellers who have tapable assets are at a disadvantage if the sellers are unwilling to work out a repayment plan with the bank.
Tip: Prepare a hardship letter, profit and loss statement and monthly budget that show the seller has little or no assets and no disposable income.
- The Buyer Does Not Qualify
A desire to buy a home and the financial means to afford a mortgage payment does not mean a buyer qualifies to buy a home. A buyer's lender will examine credit history, length of time on the job, debt ratios, and a host of other criteria to determine a borrower's qualifications. To gain credibility with the seller's bank, buyers need to submit a loan prequalification letter along with the offer, but a loan preapproval letter carries more weight.
Tip: Send a preapproval letter and a copy of a sizeable earnest money deposit that adequately reflects the buyer's ability to obtain a mortgage and intent to close the transaction.
- The Bank Sold the Loan
Sometimes, the bank won't realize it no longer holds the mortgage on the property until many months have passed by during short sale negotiations. If the bank has sold the mortgage to another lender, the bank has no authority to approve a short sale because it has released the asset. Although the seller may continue to receive statements from the bank, the bank might be servicing the loan but not own it.
Tip: Ask the title company to check the public records for an assignment of deed of trust or other documents that reflect the loan has been sold. Redirect your short sale package to the new lender.