The bottom line for any Lender is- doing the math and figuring out a way to cut their losses. So, if the situation presents itself in way where a short sale is the best chance of controlling their losses, a lender will approve such a transaction.
However, there are several other instances where a lender might approve a short sale. Listed below are some of those situations where you might have more control to influence a short sale.
The Bottom Line
You might be wondering, why would a lender approve a short sale where they would have to accept a payoff that falls short of the full amount of debt. It’s really simple. A lender will always look to cut off their losses. So, it all comes down to the recovery method- which situation will allow the lender to recover the maximum amount of debt.
If the borrower defaults on his or her mortgage due to non-payment, two situations may arise. The lender and the borrower enter into an agreement. If that doesn’t work out, the property will eventually face foreclosure. However, foreclosure is a lengthy and expensive process and, generally, creates a detrimental financial proposition for both lenders and investors.
They have to spend money instead of earning, incur legal fees, and are eventually stuck with an unwanted devalued property. Lenders will always want to avoid such a situation and look for a better solution. The only exception to this are some FHA-insured loans, as FHA have stricter qualifying process. In some cases, the aggrieved parties may modify the terms of the contract or loan to arrive at a more appropriate resolution. However, not all loan modifications may work out. Borrowers might re-default and the whole cycle gets repeated again.
Short sales offer the lenders the chance to settle for a small loss, instead of facing foreclosure. This is the permanent solution as the mortgage is paid out and closed off, and the devalued property is transferred to the third party.
Does the offer for short sale represent FMV?
One of the primary thing that a lender consider in short sale is whether the purchase offer reflects the Fair Market Value (FMV). As the lender agrees to incur a loss of money, they will not want to inflate such loss. A lender will commission a Broker’s Opinion Price (BPO) to determine the Fair Market Value at that time and then decide whether the short sale is acceptable.
Demonstration of Hardship
Official guidelines of most government short sale programs require the borrower to experience some sort of hardship. This experience should be the cause of their current financial hardship. However, this reason is only prevalent in negligible cases. In most instances, the short sale is approved if the lender concludes that the foreclosing costs exceeds their normal cost. They will overlook the hardship issue in some circumstances.
Junior Leaders
Having junior lenders or other lien-holders is beneficial for the approval of short sale, but it doesn’t always represent a stumbling block towards compliance. If there is only one lien-holder, the situation obviously becomes simpler, as all documentation and approval travels through that individual. However, if the property faces foreclosure, junior lenders only inherit the right to pursue the borrower for a deficiency battle, which may or may not culminate successfully. They are generally more open towards approving a short sale, as it provides the opportunity to negotiate a small settlement. Their main motto is- anything is better than nothing.
Mortgage Insurance
Earlier, the presence of mortgage insurance (MI) in a loan was considered a step towards the approval of a short sale, if such a circumstance presents itself. All loans where the down payment by the buyer falls below 20% requires mortgage insurance. However, there are situations where the lender purchases MI without communicating with the borrower even when the latter’s proceeds for down payment exceeds 20%. In such cases, the homeowner seeking approval for a short sale might be surprised to find out of the MI policy.
Recent changes to FHFA short sale guidelines state that mortgage insurance will no longer be an obstacle to a short sale transaction. The changes implemented in the short sale approval process on November 2012 authorizes loan services to provide approval themselves. They won’t have to experience the hassle of presenting the case to the mortgage insurer or investor.
Meeting Deadlines
This situation depends entirely on the hands of the borrower, which includes providing information and submitting paperwork. During the short sale process, your lender might forward requests for declaration of information for evaluating your case and subsequently issuing approval. Procuring approval can be a time-sensitive process, as buyers may become frustrated after waiting for an elongated period, which may subsequently result in them walking out. Thus, you will be left to start everything from the scratch.
In some circumstances, the lender has a trustee sale schedule in place, that is, if the short sale is not approved after a certain date, the auction for foreclosure will be authorized. Also, there are examples where the lender is a few steps away from approving the short sale but opts for the trustee sale. So, the best way to increase your chance of approval is to respond promptly to any request of documentation or information.
Banks vs Credit Unions
Credit unions are more likely to approve a short sale when compared to banks. However, they also offer inferior odds when it comes to waiving off the deficiency balance of the loan. In case they do approve, they might demand a cash contribution or promissory note signed by the seller which promises to pay off the full balance or a reduced balance. The motivation behind such demands are justified as- providing protection to the credit union members and shareholders. Recently, credit unions have slackened their requirements. It is worth having a polite conversation with your lender as you still inherit some negotiation power.
For example, if your lender refuses to waive your deficiency balance, you can refuse to agree to the short sale. The lender will be forced to face foreclosure. This situation is more unfavorable to them when compared to a short sale. And if they are junior lien-holders, they gain next to nothing.
You can also opt to agree to the short sale, and subsequently declare bankruptcy. This will eliminate your obligation to repay the deficiency balance, which again provides you with the upper hand in the negotiations.
Political Pressure
Lenders might face political pressure to approve a short sale procedure. Such a circumstance may arise due to settlement between the federal governments and large banks, as an effect of unlawful foreclosure practices by the latter. For example, incomplete document trails, robo-signing of documents and misplacement of documents. A crucial part of the settlement agreement would include the government influencing lenders to stem foreclosure and approve more short sales.