Why Would a Lender Accept a Short Sale?

Why Would a Lender Accept a Short Sale?

Short sales were very popular as the 2008-2010 real estate crash was strongly underway. However, they still occur. What is a short sale and why do they happen?

A short sale can be the solution when the proceeds from the sale of a home will not be enough to cover the mortgage payoff, commissions, and all other closing costs.

And despite popular belief, a seller does not need to be behind on their mortgage to request a short sale, they simply need to demonstrate that the house can’t be sold for what is owed.

With a short sale, the bank agrees to accept less than full repayment of the mortgage in an effort to avoid a potential foreclosure which would amount to larger losses for the lender. If approved into the lender’s Short Sale program, the lender agrees to “write-off” as much of the mortgage as is necessary for the home to be sold at market value with typical closing costs.

There is a catch, however: the borrower (seller) may still be liable for the full amount of the remaining balance of the loan, even if the property value is less than the remaining balance. The lender may come after the seller for any loan pay-back deficiency. This event is known as a Deficiency Judgment.

Deficiency Judgment is a judgment in favor of a mortgagee (lender) for the remainder of a debt not completely cleared by the sale of the property.

When a seller finds that a deficiency judgment will be filed for the difference between what they owe and the net proceeds from the short-sale, a common response is “Forget it then; I’ll just let it go to foreclosure.”

The choice is really the lesser of two evils. If the investor’s guideline is to file for the deficiency judgment on their losses, this will most likely be the policy no matter if the loss results from a foreclosure or a short-sale. The short-sale would be a way for the seller to minimize the amount of the deficiency judgment, however. This is something the homeowner can negotiate with the lender.

Why would a mortgage lender accept a Short Sale rather than foreclose?

Real estate law and the foreclosure processes differ from state to state and lenders do not want to tie up their financial and legal resources trying to keep up with all the state-specific laws.

The foreclosure process is too time intensive, too costly and state-to-state specific. Banks would rather simply “cut their losses” and move on to replacing “bad loans” with “good loans”. For the most part, mortgage companies want to be in the lending business, not in the real estate business.

As we all know, mortgage lenders make money by lending money. If the amount they have to hold in reserves is related to the amount they have tied up in REOs, it makes sense that they would want to keep these properties at a minimum.

Have you had any experience with short sales?

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