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What is Involved in a Short Sale Approval?

Dale Marshall
Dale Marshall

A short sale approval is granted by a lien-holder on a mortgage when objective analysis indicates that any other course of action will be more costly or impractical. To obtain the approval, the parties involved in the transaction must convince the lien-holder — usually the primary mortgage lender — of that fact. Depending on the circumstances, this can be a long and frustrating process even when successful. There are instances, however, of lenders approving short sales within reasonable periods of time, for example, 15 to 45 days.

Many homeowners who encounter financial problems and are unable to make their mortgage payments attempt to sell the house before the lender forecloses, only to find that it’s lost value. When the best offer on the property isn’t enough to pay off the mortgage and the other costs associated with selling a home, the homeowner should approach the lender’s loss mitigation officer and request a short sale approval. As part of this request the homeowner should document his own financial situation as well as the best professional estimates of the property’s actual value. Additional material that may help support the request is documentation of the attempt to sell the house.

In a short sale, a homeowner sells his house for less than he owes on it.
In a short sale, a homeowner sells his house for less than he owes on it.

In some cases, there may be other liens on a property in addition to the primary mortgage. Depending on the circumstances of the liens, short sale approval may be required from these additional lien-holders. These so-called junior liens may veto a short sale, but if that happens and the primary mortgage is foreclosed, most junior liens are extinguished.

Another type of short sale is initiated after the lender has already foreclosed on the loan and taken possession of the property. When this is the case, most other liens on the property have been extinguished by the foreclosure process, and the lender is the only party a buyer must deal with. The buyer or broker approaches the lender’s Real Estate Owned (REO) department and makes an offer less than the outstanding balance due on the loan.

When dealing with a lender’s REO department, there’s no need to document the buyer’s financial situation. It’s prudent, though, to make a case for the short sale. This is done in a number of ways, such as providing data on the sales of comparable properties in the neighborhood or taking pictures of the property and the neighborhood, demonstrating that it’s run down. Another tactic is to give the lender estimates of the repairs and maintenance necessary to bring the property to marketable condition. This is especially useful if the property's plumbing and electrical cabling has been removed by thieves, or if it's been damaged by vandals.

Whether the property is owned by the borrower or lender, short sale approval is difficult to obtain. The lender’s loss in a short sale is easily determined, while estimated losses due to foreclosure are less definite. Lenders sometimes overestimate their chances of selling a property after foreclosure. In addition, the costs of maintaining and renovating REOs are seen by some as a normal cost of doing business rather than a loss resulting from a non-performing loan. These are the primary reasons a lender might reject a short sale application when it appears on the surface that the short sale is the better option from a financial perspective.

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    • In a short sale, a homeowner sells his house for less than he owes on it.
      By: Horticulture
      In a short sale, a homeowner sells his house for less than he owes on it.