Bank Short Sale Approval Tips

Before selling your property in a short sale, you must get approval from your bank to sell your home for less money than you owe on it.  A short sale does save the bank the cost of pursuing a foreclosure, yet some banks are still hesitant to allow homeowners to do a short sale.

The guidelines for a short sale approval vary from bank to bank.  Most banks are looking for at least the basic information related to property value, potential deficiency, homeowner’s assets, MHA participation requirements and a letter of hardship.  All of this information helps the bank decide whether they will consider and eventually approve an application for a short sale.

Recovering the largest amount possible of the mortgage is a primary factor in getting short sale approval.  Foreclosure is expensive for the banks, costing up to $50k or more.  This is a loss on the bank’s profit/loss statement; therefore they try to avoid this situation.

If the bank feels the area the property is located in is improving, there is greater potential that they may get more money for the home by foreclosing and reselling.  If the area is not great, or is in decline, the bank may be more interested in doing a short sale.

In a short sale, a deficiency is when the homeowner owes more on the mortgage than selling the property generates.  In many states, the homeowner is responsible for repaying this deficiency.  Often a homeowner will apply to do a short sale on their home without realizing they will still be responsible for the deficiency.

Banks commonly sue for short sale deficiency when the homeowner is steadily employed; employment allows the bank to have the homeowner’s wages garnished.  Banks generally do not sue homeowners living on government benefits or retirement income.  These types of income cannot be garnished; therefore suing becomes a waste of time and money.

Banks may claim unrecoverable deficiencies as tax deductions.  The Mortgage Forgiveness Debt Relief Act allows homeowners to have a deficiency forgiven through 2012 without having to claim it on their income taxes.  Beyond 2012, homeowners may again have to include forgiven deficiencies as earnings on their income taxes.

Banks will not give short sale approval simply as a convenience allowing the homeowner to walk out on their upside down mortgage.  The homeowner needs to prove they do not have enough income or assets to be able to make their monthly mortgage payments.  If the homeowner cannot prove this, the bank will expect the homeowner to use their income or assets to continue making payments until they cannot do so any longer.  This allows the bank to collect as much money as possible before they will consider a request to do a short sale.  A hardship letter provides a vehicle for the homeowner to demonstrate their lack of ability to make their mortgage payments.  The letter typically notes a lack of assets as well as some unfortunate, unforeseen circumstance which has caused the homeowner to be unable to pay the mortgage.

The federal government has a program called “Making Home Affordable.”  If the homeowner received their mortgage through Fannie Mae or Freddie Mac, the bank is required to use the Making Home Affordable program and follow those guidelines on short sale approval.  Through this program, the short sale is usually the final option when loan modification has failed.

Any homeowner interested in pursuing a short sale would find it in their best interest to seek the advice of a realtor experienced in short sales.  The experienced realtor can assist with the hardship letter, negotiations with the bank and the many other details involved in getting short sale approval.