4 Reasons Banks Reject Short Sales

Short sales of homes can offer buyers good deals and get a seller out of a financial jam. Ultimately, however, the bank or other lender holding the mortgages determine if short sales go through. The following four points explain why short sales might be rejected by bank.

The Price Isn’t Right

Short sales are when a homeowner, with the mortgage holder’s permission, puts a home up for sale and dedicates the proceeds to the mortgage. Even if that amount is less than the mortgage, the lender accepts it as paid in full. But even if buyers and sellers agree on prices for short sales of homes, the bank will reject them if the price is too high or too low.

Too High - To gain permission for short sales, homeowners must demonstrate financial hardship. If the sale of the home would pay off the mortgage balance and still have money left over for the homeowner, the bank usually will not consider the homeowner to be in financial hardship position and will not allow such short sales.

Too Low - Typically, the bank or mortgage holder will accept 90 percent of homes’ current market value in short sales. The goal is that the loss on the loan is offset by avoiding the costs of foreclosure proceedings. If offers in short sales are too far below market value, it makes more sense for the lender to force the homeowner into foreclosure.

Seller Does Not Qualify

Banks are under no obligation to allow short sales. Typically, requests for short sales come in a declining housing market, which also usually accompanies economic slowdown, job loss and rising foreclosure rates. If a homeowner is in economic distress and will likely default on the mortgage - forcing foreclosure - the homeowner can apply for short sale. The homeowner must document the financial hardship.

Short sales are, in essence, forgiveness of part of a debt by a lender. They will want evidence that it is required.

Buyer Does Not Qualify

Short sales of homes function like any other sales in most respects. The home is listed by an owner or with an agent, and a buyer, either representing himself or through an agent, makes an offer. In a typical sale, the seller determines whether to accept the offer. In short sales, the lender determines it. If the offer is accepted, the buyer still must qualify for a loan on the home. Even though the home is being sold at below market value, the buyer must apply and be approved for a new mortgage.

Market Doesn’t Justify It

Short sales requests from homeowners also might be rejected if the housing market is turning around and the bank believes the house will be worth more soon. Housing markets are cyclical. The decline in home values that leads to many homeowners seeking short sales eventually bottoms out and begin to rise. Banks will not be inclined to sell a home at 90 percent of market value if the value of the home will be rising throughout the foreclosure process.