A Short Sale: How Will I Know If I Qualify For One?

Jul 22
07:22

2010

Gerald Lucas

Gerald Lucas

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If your mortgage loan balance is higher than the value of your property and you don’t have the money to make up the difference, you probably want to k...

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If your mortgage loan balance is higher than the value of your property and you don’t have the money to make up the difference,A Short Sale: How Will I Know If I Qualify For One? Articles you probably want to know whether you’d qualify for a short sale.  To find out, we have to look at a short sale from a bank’s perspective.  While there are many factors that banks consider, getting your lender to approve your short sale application generally boils down to 3 main challenges: 

1) Getting your lender’s attention and giving your lender a reason to discount your mortgage loan

2) Demonstrating that you have a legitimate financial hardship preventing you from paying your mortgage

3) Getting your lender to accept that the price your buyer is paying for your property is close enough to your bank’s independent valuation of the property 

To understand why these are the three key requirements, we have to understand how banks make money and how they limit losses.  Banks earn profits by collecting interest payments on money they lend.  It stands to reason then that in most cases banks won’t even consider a short sale application if the borrower is currently paying his mortgage.  However, when those payments stop, instead of making money, the bank is now losing money and as a result has an incentive to limit those losses.  Although banks lose money when a property is sold via short sale, the sale of the property allows the bank to recover a portion of the defaulted loan and get the ‘bad loan’ off its books.  Banks always take notice when they don’t get their money and borrowers who miss mortgage payments force lenders to at least consider discounting the mortgage. 

The second major challenge in qualifying for a short sale is demonstrating that you have a financial hardship.  Banks lend money expecting to get that money back, which is why they need a very good reason to accept less than the total amount that they are owed.  The most compelling reason for a lender to accept less than the total amount owed is that the borrower doesn’t have enough money to make the interest payments or to pay off the balance of the loan.  As the saying goes, you can’t squeeze blood from a turnip.  Even so, the borrower must prove his financial hardship to the bank’s satisfaction with supporting documents like tax returns, bank statements and pay stubs.  Demonstrating financial hardship is critical to getting your lender to approve your short sale.

The third key challenge in getting a short sale approval is showing that the price your buyer is paying for your property is indeed the property’s current market value ( that is current market value in the eyes of the bank!).  The simple truth is that a property is worth what a buyer is willing to pay for it.  Nevertheless, just like the bank has the final say when it comes to approving your short sale, they also have the final say with respect to the market value of your property.  In spite of this, documenting that similar properties in your neighborhood have recently sold for a similar price will help persuade the bank that the price your buyer is paying is sufficient.  

In summary, to qualify for a short sale you must prove you have a financial hardship and that you are selling your property at current market value in the eyes of your lender.  More importantly, you have to give your lender a good reason to discount your mortgage.   Since non-performing loans normally reduce the amount of money a bank can lend, when a strong case for a short sale is made, your bank should want to help you get rid of both your property and the mortgage loan attached to it.