Your Next Steps When Your Short Sale is Denied
You don't necessarily have to give up if a bank denies your short sale, but you should take several steps and precautions first before you try again. Be sure to check on the status of your contract with the previous buyer so you'll know you're in the clear legally to contract with someone else. You'll also want to be prepared for a deluge of phone calls from other real estate agents.
Definition of a Short Sale
A short sale is the process by which your lender allows you to sell your home for less than your outstanding mortgage balance. The seller must substantiate to the lender's satisfaction that there's no realistic way for them to continue making payments, generally because something catastrophic has happened like job loss or divorce.
A short sale requires the lender's approval and agreement to waive the outstanding balance, and sellers should make absolutely sure that this provision is included in their approval.
Banks often prefer short sales to foreclosures because foreclosures can be long, drawn-out, and expensive affairs.
Check Your Contract Status
You and your buyer probably signed a purchase contract if your short sale paperwork was submitted to a bank. Most short sale contracts contain some sort of an addendum that makes the contract subject to short sale approval, and there's probably a time limit imposed as a condition of the purchase contract.
You can't legally sell your home a second time if you're still obligated to an existing buyer, so check the paperwork. Call the title company or the buyer's agent, and make sure the contract is canceled in writing if it hasn't expired.
Contacts From Other Agents
You'll probably start receiving telephone calls from many other agents if your listing has indeed expired. They'll offer their services or suggest that they have buyers for your home. These agents most likely do not have buyers.
There's no guarantee that agents who chase expired listings have any experience in working with short sales.
Be sure to hire an extremely well-versed agent who has negotiated many short sales. An inexperienced agent without a strong background in this area could hurt your cause and might well be the reason your first short sale wasn't approved. Most veteran short sale agents don't ever give up until a short sale is approved.
Hiring a New Agent
Put your home back on the market with fresh photographs and find a new buyer. Make sure the buyer will remain committed to waiting for your short sale approval.
You might require that the buyer's agent make a promise in writing that they won't write more offers for the buyer after the offer is accepted.
Not every buyer is actually willing to commit to buying a short sale property, and a committed buyer is necessary. In fact, you don't really have a buyer under contract if the buyer isn't committed. You just have a worthless piece of paper.
Make Sure You Qualify
Most banks require that a seller fit one or more of the parameters required under that bank's particular guidelines before they'll grant a short sale. They'll require a written statement explaining why you need approval, referred to as a "hardship letter." Not every bank operates under identical guidelines, but some circumstances apply to just about every short sale:
- You spend more money than you currently earn.
- You're getting a divorce or are divorced and you can't afford the home by yourself.
- The interest rate on your loan is about to adjust or has already increased.
- There's been a death or medical illness in your family that's caused mortgage delinquency.
- Your loan is in default by at least 30 days from when your last payment was due.
- You're unemployed with little prospect of employment.
- You've completed a bankruptcy that has discharged all your debts.
A short sale is sometimes denied due to something as simple as the seller being current on paying their mortgage. The bank's guidelines might state the bank isn't allowed to approve a short sale if the mortgage payments aren't in arrears.
Review Your Hardship Letter
Make sure you include the reasons for your request in your hardship letter. Bank negotiators handle a large volume of files, and they don't always scrutinize every single document as carefully as they possibly could. Make it very clear that you're experiencing a hardship and provide documentation to prove it.
Send a copy of your divorce paperwork to the bank if your marriage has ended or is ending. Include invoices from your doctor with medical diagnoses or treatment plans. Itemize all your monthly income versus outflow.
Some bank financial statements don't provide spots or boxes for a borrower to include all expenses, so create your own. List your income on the left and all expenses on the right, regardless of the paperwork the bank gave you to complete. Show a negative number at the bottom by subtracting your debts from your income.
Make it very easy for the bank negotiator to understand your financial picture clearly.
Resubmit Your Request
The likelihood is that your short sale will eventually be approved. Banks want to do short sales. The National Mortgage Settlement provides financial incentives for banks to do short sales, as does the HAFA short sale program.
In fact, most banks prefer to make a short sale over a loan modification, in which the lender agrees to restructure your mortgage, perhaps tweaking your interest rate or extending the term to move your mortgage obligation into the neighborhood of 31% of your gross monthly income. This is the standard by which the federal government considers your loan to be "affordable."
The odds that your short sale will be approved shoots up dramatically if you're presently in a loan modification.
Consider a Deed in Lieu of Foreclosure
You might also consider asking your lender to accept a deed in lieu of foreclosure if you simply cannot qualify for a short sale. This involves surrendering the property to the bank in exchange for cancelling the mortgage. This, too, allows the lender to avoid the long, costly process of a foreclosure.