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Short Sale Approval from the Bank's Perspective


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TERMINOLOGY

If you can’t afford to pay your mortgage but don’t want to endure a foreclosure or have the foreclosure on your credit report, you may ask the bank’s permission to sell your home in a short sale. Through a short sale, you can sell the home for less than the property’s fair market value.

A Short Sale Saves a Bank from Foreclosure

Many individuals believe that lenders want to foreclose on their homes. This, however, couldn’t be further from the truth. When reclaiming a property, lenders incur significant costs, such as the cost of marketing the property if it doesn’t sell at auction, the cost of maintaining the property and the cost of the foreclosure itself. In many cases, the bank cannot sell the foreclosed home for enough money to make up for its expenditures during foreclosure.

Short Sales Common on “Upside Down” Homes

If you owe more to your lender than your house is worth, you are “upside down” on your home loan. Homes that are upside down are less likely to sell at auction than homes with equity. No one wants to pay more than fair market value for a home.

Thus, it is sometimes in a bank’s best financial interests to allow you to sell your home in a short sale. The lender knows that there is little likelihood of recovering the full amount you owe by marketing the home itself. If you sell the home in a short sale, the lender’s losses may be less than they would be if the lender proceeded with a foreclosure.

Homeowners Less Likely to Damage Property

Many homeowners, when faced with the prospect of foreclosure, vandalize their property before they leave. Vandalizing encompasses more than just putting holes in the wall or spray-painting the windows. Some homeowners go so far as to rip up carpet and remove doors. Such acts reduce a home’s value and cause the bank to take an additional loss on the property. By approving a short sale, however, the lender knows that the homeowner is less likely to damage the home--allowing it to recover a greater percentage of the loan balance.

Banks Consider a Home’s Equity

Before approving a short sale, the bank will evaluate your home’s equity. The less equity you have, the more likely your lender is to approve your short sale. If you have significant equity in your home, the equity present may be enough to offset the costs the lender would incur through foreclosing on your home, maintaining it and marketing it. Should this be the case, it is usually in your lender’s best financial interests to foreclose rather than agree to a short sale since a foreclosure may not result in a loss.

The Bank Evaluates Your Assets

One of the primary factors that contributes to a bank’s approval of your short sale is your assets. If you have stocks, other investments or a steady income, your lender will expect you to repay the amount you still owe on the mortgage after the short sale is complete. If the bank were to foreclose on the home, it would need to sue you to recover the difference. With a short sale, however, the lender can negotiate for your voluntary repayment of the mortgage deficiency--resulting in a lower loss margin, if any, on your home mortgage loan.