Solutions to Common Types of Short Sale Problems
Question: Solutions to Common Types of Short Sale Problems
A reader asks: "We just put our home up for sale as a short sale. Now, my wife is having second thoughts, I think, or maybe she is just scared. She wants to know what can go wrong in a short sale. What kind of short sale problems will we face? Is there anything I can do to assure her that our short sale will close? What types of short sale problems are the most common?"
Answer: Asking what can go wrong in a short sale is a little bit like asking what you are going to die from. You know you will die but the cause of your death is almost impossible to predict -- there are too many diseases and complications to choose from. With a short sale, you know you will have problems. The question is how many short sale problems can blow the short sale out of proportion or, more accurately, what can you do about short sale problems?
The Biggest Short Sale Problem
The most common type of short sale problem is when the seller has no hardship. Most sellers know that a short sale means the home is underwater. You can't do a short sale on a home that will sell for enough to pay off the mortgage in full and pay all of the costs of sale. When there is not enough equity to pay the amount due the bank, the home sells short.
Simply being short to the bank is not reason enough to do a short sale, in most cases.
Generally, the bank expects to receive a hardship letter from the seller describing:
- How the seller got into trouble
- What the seller has done to fix the problem
- Why nothing will work
If the sellers' situation is the same as it was on the day the seller took out the mortgage, the lender is very unlikely to grant the short sale.
Most banks insist on a seller hardship. No hardship is a short sale problem that can result in short sale rejection.
Solution to this short sale problem? Either try again after a hardship occurs or offer to participate in the bank's loss by making a seller contribution.
Multiple Loans Can Be a Short Sale Problem
Some junior short sale banks have a reputation for being difficult. Typically, those banks can go one of two ways. Either the bank will reject the short sale or the bank will approve it, it's black or white and your odds are about 50 / 50 with certain banks.
This does not mean that every time you encounter a short sale with two loans that the second lender will cause problems, because that is not the case. However, the cause of the problem with the second lender is often amount of payoff. The first lender might not want to pay the second lender more than, say, $3,000.
If the home goes to foreclosure, quite possibly the second lender may get wiped out. But it doesn't mean the second has no recourse, or that the second is not paid through the PSA or stand to receive substantial bail-out funds from the government.
A solution to this short sale problem is to put pressure on the second lender to take the short sale or get the first lender to contribute more.
A first lender might back down and agree to pay more. If a first lender's guidelines prohibit that payment, the guidelines might allow, say, a credit to the buyer toward closing costs, who can then pay the second. But check with the buyer's lender first. Sometimes the first lender will allow the seller to pay more to the second.
No Release of Personal Liability is a Short Sale Problem
Far as I am concerned, the main reason to do a short sale, apart from avoiding the stigma and pitfalls of foreclosure, is to get a release of personal liability. Borrowers deserve to be released from the loan, to be assured the lender will not pursue them for the deficiency after the transaction closes.
Granting the short sale and releasing a seller from liability are two different things. A bank can agree to do a short sale and still reserve the right to pursue the seller for the amount unpaid.
Generally, if a short sale letter does not specifically address the issue, the seller is not released.
Some sellers in California say SB 458 protects them because it amended CA Civil Code 580e. Civil Codes can be changed. Laws can be overturned or found to be unconstitutional. The solution is to insist on being released.
The bank will tell you it cannot change the verbiage, but it's the negotiator who does not want to be bothered. Banks can and do change the verbiage. Insist on it. If your agent can't get it for you, hire a short sale lawyer to obtain the release of liability.