In the U.S., before you can sell your home via a short sale, the bank must provide you with its approval to market and sell the property for less than you owe. While short sales save the bank from paying foreclosure related expenses, some banks are hesitant to grant homeowners permission for a short sale.
Bank Approval Guidelines for Short Sales
While all banks and mortgage companies differ concerning the guidelines for granting a borrower a short sale, banks often look at the following criteria:
- The value of the property
- The potential short sale deficiency
- The homeowner’s assets
- MHA participation requirements
- The short sale hardship letter.
Each of these factors comes together to determine whether or not the bank will approve, or even consider, a homeowner’s short sale application.
How Property Value Influences Short Sale Decisions
A lender’s primary motivation in approving a short sale application is to recover as much of the overdue mortgage balance as possible. Foreclosure can cost lenders as much as $50,000 and, in some cases, even more. This is money deducted from the bank’s bottom line – a situation the lender wants to avoid if it can.
The value of a property is a significant factor in determining whether the bank can bolster its bottom line through a short sale or whether a foreclosure would be a better option. If the market in a borrower’s neighborhood is steadily improving, the bank may decide to foreclose on the property rather than approve a short sale application, since the potential exists to recover a greater amount the unpaid mortgage loan down the road rather than allowing the borrower to sell the home for a lesser amount right now.
The Short Sale Deficiency, Lawsuits and Taxes
A short sale deficiency is the difference between the sale price of a short sale home and the amount the borrower originally owed on his mortgage. In most states, mortgage lenders can continue to pursue this balance long after the short sale process is complete. Many borrowers apply for a short sale never realizing that, by agreeing to their proposal, their bank isn’t necessarily agreeing to overlook any resulting deficiency.
Banks will often sue for a short sale deficiency if the former homeowner has steady employment that will allow the bank to secure a successful wage garnishment against him. Banks are less likely to sue individuals who live primarily on retirement income or government benefits, as these forms of income are exempt from seizure.
In the event that a bank cannot recover a short sale deficiency through a lawsuit, it may claim the unpaid portion of the mortgage as a tax deduction. The Mortgage Forgiveness Debt Relief Act, protects former homeowners from having to pay taxes on the forgiven deficiency through 2012. After 2012, however, borrowers will once again be required to include any forgiven short sale debt in their earnings for the given year and pay taxes on it.
See: Mortgage Deficiency Judgment After Foreclosure or Short Sale
The Homeowner’s Assets and Short Sale Approval
Banks don’t want to approve a short sale merely so a homeowner can walk away from an upside down mortgage. Thus, each mortgage lender will want proof that the individual lacks sufficient income and assets to successfully pay his mortgage payment each month.
If the homeowner owns significant assets, the mortgage company will expect him to channel those assets into his defaulted mortgage for as long as possible – increasing the mortgage lender’s bottom line – before requesting a short sale.
The Short Sale Hardship Letter
Banks consider hardships a good indicator that an individual is a candidate for a short sale due to his financial distress and lack of assets. One way that many homeowners request a short sale from their mortgage companies is through a short sale hardship letter. The letter should demonstrate to the bank that no assets are available with which to pay off the defaulted mortgage. It may also outline any unfortunate or unexpected circumstances the homeowner has suffered that brought about his inability to make mortgage payments.
See: How to Write a Short Sale Hardship Letter for a Home Mortgage
Making Home Affordable Influences Bank Short Sale Approval
The federal government’s Making Home Affordable program provides guidelines that participating lenders must follow when negotiating mortgage loans for homeowners. If an individual’s mortgage loan is serviced through Freddie Mac or Fannie Mae, his lender must participate in the Making Home Affordable program and follow the government’s guidelines for short sale approvals. Through Making Home Affordable, short sales are typically utilized as a last resort when loan modification is unsuccessful.
Obtaining Short Sale Approval From a Bank
Homeowners interested in a short sale should speak to a qualified real estate agent with experience negotiating short sales. The real estate agent can prepare the homeowner for what to expect throughout each step of the short sale process, help him prepare his hardship letter and assist him in other necessary negotiations with his mortgage lender.
Candice Edwards - Candice Gillingwater is a credit specialist and consumer advocate currently living in Georgia. Her goal is to educate the public about ...
