Why would a lender approve a short sale?

Why would a lender approve a short sale? There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a “short sale.”

When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales.


If you are considering buying there could be drawbacks. You may have to wait about 3 years to repurchase a home after completing a short sale.


For your protection, I suggest that all borrowers:

* Obtain legal advice from a competent real estate lawyer     

* Call an accountant to discuss short sale tax ramifications            

As a real estate agent, I’m not licensed as a lawyer or a CPA and cannot advise on those consequences. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. will consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. This amount is known as a deficiency However, it’s important to get the deficiency waived in the short sale approval letter issued by the seller’s lender.


The Mortgage Debt Relief Act has yet to be extended past 12/31/13. As realtors, we are hoping this will be extended through this year.


Lenders have varying requirements, but most require similar documentation such as the following:


Third Part AuthorizationAllows a third party such as a relator or attorney to speak to the bank on behalf of the seller.


Hardship LetterThe sadder, the better. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a truck ran over your entire family, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.


Proof of Income and AssetsIt is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.


Copies of Bank StatementsIf your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it’s probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.


Pay StubsIf the seller is working the bank usually wants to see the last 2 consecutive pay stubs.