What Can We Do When the Bank Has Declined Our Short Sale?

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Question: What Can We Do When the Bank Has Declined Our Short Sale?

A reader asks: "My employer transferred me from southern California to Alaska. Like many who bought in 2005, my home is worth less than our mortgage. We put it on the market thinking that the bank will undoubtedly agree to let us do the short sale. We sent the offer to the bank and wrote a hardship letter. After months of submitting piles and piles of paperwork, the bank declined our short sale. The bank said we can still afford to make our mortgage payment as evidenced by the fact we are still making our mortgage payment. What can we do? Can we contest the decline letter? Soon, we will be out of money."

Answer: You would think a bank would not decline a short sale for a homeowner with an out-of-area job transfer. Especially a person whose employer moved him to Alaska, thousands of miles from his previous home. Because usually a 100-mile job transfer will qualify for a short sale.

But little astonishes me when it comes to a short sale. Maybe I've become a bit jaded over the years or maybe I just expect banks not to question nor bend on ridiculous guidelines because they often do not.

Sometimes, when a short sale is declined, that rejection might be based on an interpretation of a guideline that can vary from one person's opinion to another. You do have options and things you can do if and when a bank declines a short sale.

Two Quick Fixes If Your Short Sale is Declined

There might come a time when it seems that your file is at a standoff. The negotiator may insist that your file cannot be approved unless you perform some impossible feat.

The short sale negotiator might threaten to close the file. Let her. Then, a few days later, initiate the file with a new negotiator who might see things differently.

Another quick fix if your short sale is declined is to ask to speak to a supervisor. Ask for the supervisor's name and contact information.

Escalate the file. It is possible your file is being processed by a lower-level employee who possesses limited reach and authority.

If Your Short Sale Is Declined Due to Current Mortgage Status

Some investor guidelines state the borrower must be in default to do a short sale. The bank might not be forthright in conveying this information. It helps to ask if the guidelines state your loan must be in default. If you stop making your mortgage payments, you might find that you suddenly qualify for a short sale.

If Your Short Sale Is Declined Due to Excessive Assets and Few Liabilities

A negotiator might determine that the balance in a bank account is too high. Ordinarily, it is not a good idea to leave huge sums of cash in a savings account at another bank and expect the short sale bank to approve a short sale. The conclusion might be that a borrower can afford to make payments but chooses not to pay the mortgage.

One solution is to pay down debt and then resubmit a bank statement with a lower balance.

If Your Short Sale Is Declined Due to No Financial Hardship

It is possible the bank might determine you have no hardship because the hardship is not yet documented. Perhaps a layoff or reduction in salary is on the horizon.

In these cases, especially if the bank has delegated authority, it might make sense to rewrite a hardship letter or ask your short sale agent to write a letter to the bank on your behalf explaining your situation.

Another solution is to offer to make a seller contribution to help offset the bank's loss. When the bank sees that the borrower is willing to somewhat mitigate the bank's loss, the bank might decide to reconsider the rejection.

If Your Short Sale Is Declined Due to Lowball Offer

There are times when a buyer might be willing to sweeten the deal and increase his or her offer. If the buyer is not willing to meet the bank's demands, perhaps it could be wise to cancel the short sale and sell to a buyer who is willing to pay more.

If Your Short Sale Is Declined Due to Mortgage Ratios

Certain types of HAFA short sales require the borrower's mortgage payment to exceed a particular percentage of gross income.

If the monthly payment is based on a less-than-interest payment for an Option ARM, consider making the full payment for a few months to raise the ratio. Or, switch to a traditional short sale.

The important thing is not to give up until you have exhausted all possible avenues. Because an alternative just might work, and you may not know if it will work until you try it.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.