In a short sale, the owner will sell their home for less money than is owed on the mortgage. A short sale is a lengthy process, one that can sometimes take more than 120 days to see through all the way. It also needs to be approved by the lender, something that is not always a straightforward, easy approval to get. Lenders can and often do reject a short sale request for many reasons.
Unless the lender has agreed to accept the short sale upfront—something that is rare—no one can be confident that a short sale offer will be accepted. Just because a listing is stating itself as a short sale doesn’t mean that it will ultimately become a short sale. This only means both the listing agent and the seller hope that the lender will accept the offer for it to sell as a short sale.
The likelihood of a lender accepting the offer varies, but if you avoid the common mistakes sellers make when pitching a short sale, you may have better luck. Below, we will take a look at seven of the most common reasons for short sale rejections:
- Buyer Qualifications
A short sale is similar to other types of home sales outside of the fact that instead of the seller, the lender decides whether or not to accept an offer that is presented by a buyer. Even if a lender does accept the offer, the buyer still has to qualify for a mortgage loan. Before the buyer has the opportunity to put forth an offer, the seller also has to get the permission of the lender to sell the home through a short sale.
The desire to buy a home and the actual financial ability to afford a payment on a mortgage doesn’t mean that the buyer automatically qualifies to purchase the home. The lender for the prospective buyer will look at the length of time they have been employed, their credit history, debt ratios and many other factors to decide whether the buyer is financially qualified to purchase a home or not. In order to get credibility with the lender of the seller, the buyer will have to submit a loan pre-approval or pre-qualification alongside the offer.
- Seller Qualifications
The seller is unable to simply walk away from their mortgage debt; the lender will require proof that there is no financial ability for the seller to pay their debt. The seller has to give the lender a letter of hardship that outlines why they can’t make the mortgage payments. This letter has to include a profit and loss statement, evidence of little to no assets and the monthly budget of the seller. The lender may not approve the seller if they have any assets that are taxable; this is because they could, in theory, work out a plan of repayment instead of going through with the short sale.
- Offer Price Too Low
Before the lender chooses to accept the offer from the buyer, the lender will have the home appraised. Should the offer be far less than the fair market value of the home, the lender may reject the offer. Though the lender aims to save money by not going forward with an expensive process of foreclosure, they may still reject an offer on a short sale in which they believe they will lose too large of an amount to be acceptable. In this case, the lender will just go ahead with the foreclosure.
- Offer Price Too High
In order for a short sale to be approved, the seller has to show that they are in genuine financial hardship and unable to pay on the mortgage. If the home can be sold for more money than what the seller owes on the mortgage, sometimes two mortgages are involved, this indicates that the seller could begin to pay the mortgage once again while having money left over. This means that the seller is not in financial hardship, so the lender may reject the offer.
- The Market
The housing market shifts in cycles. If a lender believes that the market is currently going up, they aren’t likely to accept the application for a short sale because it is possible that the home will soon be worth more money. The lender will likely reject the short sale and begin the process of foreclosure. This will offer the extra time that is needed for home prices to increase as predicted.
Bonus
- Paperwork
Lenders will need all of the necessary documents in order, otherwise, they will choose to reject the short sale. No document can be missing or incomplete. Keep in mind that the lender requires the receipt of a letter of hardship, as well as a loan approval from the buyer, to feel comfortable enough to accept the request for a short sale. Should any necessary documents be missing, they will immediately prevent the proceedings of a short sale.
- The Lender Sold the Loan
In some cases, a lender may fail to notice that they no longer hold the mortgage for the home nor do they service the loan until a few weeks have passed into the short sale negotiations. If the lender has sold the mortgage loan to a different lender, the original lender no longer has the authority to approve a short sale, to begin with, since they released the asset. Though the seller may continue to receive statements sent from the original lender, this is only an indication that the lender is servicing the loan but is no longer in ownership of it.
While a short sale can help a homeowner avoid the credit-damaging process of a foreclosure, it is not a simple way out of a mortgage. There may be issues standing in the way of a homeowner selling their home through a short sale and a buyer purchasing it, and most of that falls on the lender. At the end of the day, the lender is looking to make back as much money as they can from the missing mortgage payments, so their decision rides on quite a bit. Above, we have outlined a few of the most common reasons why short sale home offers are declined.
