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How does a bank decide whether or not to approve a Short Sale?

Last year I attempted to purchase a house that was up for short sale. The owner accepted my offer but the bank denied the short sale. Now the owner has stopped making payments and we are trying the short sale again. I am willing to pay the appraised value for the home. What determines whether or not the bank will give the thumbs up or down on the short sale? Is there anything I can do as the buyer to help the process go through?

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3 Responses to “How does a bank decide whether or not to approve a Short Sale?”

  1. Ryan said :

    There are a lot of factors that go into the bank saying yes to taking an offer that is less then what is owed on the property. Some of those range from the previous lender if the loan was sold, was there fraud in getting the loan,is there Mortgage Insurance that covers the lenders loss, is there a Second Mortgage, whats the current workload of other shorts/foreclosures in the given area. These and many more questions have to be reviewed by the underwriter to approve the Short Sale. There is really nothing Short about a Short Sale… but you making a full price offer based on current value should really help to bump your file higher on the list.

  2. Paul in San Diego said :

    When an owner applies for a short sale, they have to fill out a hardship package, which describes the reason why they can’t continue owning the house due to some hardship. A hardship can be a death in the family, divorce, loss of a job, etc. And, “I owe more than the house is worth” is not a hardship.

    They also have to submit a list of all assets and debts. The bank then uses this to determine if they really should grant the short sale or if the owner should liquidate some other assets to make their payments. Or, maybe they will approve it, if the seller liquidates some other assets and kicks cash into escrow as a condition for the approval.

    Another consideration is how much the bank – and other lien holders – stand to lose by approving the short sale. If, for example, they owe $350K on a property that would realistically only get $200K, the bank stands to lose $150K right off the bat. And, even if they agree to write that loss off, if there are other lien holders (a tax lien, a second mortgage, etc.), the bank has to negotiate with the lien holders as to what they will accept to clear out the lien. If they want to be paid in full, the bank would lose even more money satisfying that request. These are the types of short sale approval negotiations that can take forever and are the most difficult to resolve.

    Once the bank approves a short sale, they will authorize a minimum acceptable offer that the seller can accept. Any offers that are less than that will be rejected out of hand. And, a buyer’s agent can usually get from the selling agent what the minimum authorized sales price is. That way, the buyer knows what to start at without wasting everyone’s time submitting low-ball offers. And, there is often competitive bidding between potential buyers of better short sale properties. So, the selling agent isn’t really losing anything by providing that information.

    One thing your agent can do (and if you don’t have a buyer’s agent, get one – this is paid for by the seller, even with a short sale) is to ask the selling agent to let him know when the bank approves a sales price and let him know immediately when that comes in, especially if your initial offer gets rejected. That way, you can swoop in with an offer that meets the minimum and you’ll be first in line for consideration. Many short sales sit on the MLS for so long that people lose interest in them. And, if you can get your offer in first that meets the lender’s minimum, that’s your best chance for having the winning bid.

  3. godged said :

    As a buyer, there is nothing you can do to help the process be successful. Even cash buyers submitting good offers get the slow walk from lenders.

    What determines whether the transaction is closed depends on the lender, but one main component is the amount of your offer vs. the amount of debt owed. And whatever the Magic 8 Ball says today.


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