Unless the lender has agreed upfront to accept a short sale, which is rare, no one knows for sure if a short sale offer will be accepted or rejected by the lender. Just because a listing is advertised as a short sale doesn't mean it will be a short sale. It means the listing agent and the seller hope it will sell as a short sale and that the lender will accept the offer. How likely is a bank to approve a short sale? That varies, but your odds are better if you can avoid common reasons banks refuse short sales.
- A short sale happens when a lender sells a home for a price that doesn't cover the mortgage plus the cost of selling the home.
- Just because a seller accepts a short sale price doesn't mean that the lender will, and the list price may be far below what the lender wants.
- Banks may reject offers when the price is low, the seller or buyer doesn't qualify, the application is incomplete, or the loan has already been sold.
What Is a Short Sale?
Short sales happen when a lender agrees to accept a home sales price that is less than the balance of the mortgage. It might look like the sales price is high enough to cover the mortgage, but if it fails to sell for enough to cover the mortgage plus the fees for selling the home, it falls into short sale territory.
In some cases, the seller may have two home loans that need to be paid off. For example, the seller might have a primary mortgage plus a home equity loan. If the seller has taken out two loans, both lenders must agree to accept a short sale.
Be Skeptical of Short Sale List Prices
The list price of a short sale home generally has 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, hoping a buyer will be enticed to submit an offer. Just because the seller accepts the offer doesn't mean the lender will, though.
If you're the seller in a short sale transaction, make sure you're not responsible for the deficiency (the difference between your mortgage balance and what your home sells for). Ask for a waiver of deficiency.
5 Reasons Why Banks Reject Short Sale Offers
Lenders require a significant amount of information before approving a short sale. Contrary to popular belief, sellers don't need to be in foreclosure or have fallen behind in making mortgage payments for a short sale to occur. A short sale agent who has sold hundreds of short sales can give you a sense of whether your short sale offer will be approved. Other agents might not have that ability.
Here are five reasons that lenders turn down short sale offers:
- The short sale offer price is too low: Lenders will request an appraisal (sometimes several appraisals), and they may also order a broker price opinion (BPO). A BPO is when a real estate agent or broker estimates the value of your property. 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 lender believes it can make more money by taking the property through foreclosure proceedings, it will reject the offer.
- The short sale package is incomplete: Ask any short sale specialist, and you'll hear horror stories of how lenders lose documentation. In some cases, it doesn't matter how many times the package is expressed overnight or faxed; the lender 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. Digital files can help with this process, but if you don't receive or complete all the digital files, you can still face the same issues.
- The seller doesn't qualify: If the seller is asking for debt forgiveness, the lender will want to see a hardship letter from the seller that explains why the seller can't afford to pay back the shortfall difference. Lenders may not approve sellers who have taxable assets since they could theoretically work out a repayment plan, but that varies by situation.
- The buyer doesn't qualify: A desire to buy a home and the financial means to afford a mortgage payment doesn't 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 lender, buyers need to submit a loan prequalification or pre-approval letter along with the offer.
- The lender sold the loan: Sometimes the negotiator won't realize the lender no longer holds the mortgage or services the loan until weeks have passed during short sale negotiations. If the lender has sold the mortgage to another lender, it has no authority to approve a short sale because it has released the asset. Although the seller may continue to receive statements from the original lender, that lender might be servicing the loan but not own it
To have the best chance of short sale success, the seller should be in regular contact with their lender(s) and the buyer should present a reasonable offer.