Factors Banks May Consider for Short Sale

What makes a lender decide whether to take
a discount on a mortgage? What formula do
they use to decide how much to take? These
are tricky questions. Each of these transactions
must be evaluated on a case-by-case basis,
and there are a number of variables involved in
each one.
A borrower is often in default or will be soon
when the lender decides to take a discount.
There may be instances where there is no
default; this usually means that the borrower
is upside down on the mortgage and what is
owed exceeds the value of the house.
There are a number of factors that a lender may
consider when deciding whether to discount a
loan and by how much, including the borrower’s
overall financial condition and circumstances,
the property’s “as is” value, and the cost to
market and re-sell the property. Also, two short
sales at the same bank may actually be held
by different investors, so the percentages and
“formulas” for approval may vary even with the
same bank.
A short sale is usually the lender’s last resort
before foreclosure. Overall, the goal is to show
the lender that a short sale is the quickest and
best way to mitigate their loss. Some lenders
will only approve a short sale when foreclosure
is not economically feasible because the
borrower is insolvent and one or more of the
following may have occurred:
• The property was purchased or refinanced at
the top of a seller’s market at an over-inflated
price, and a substantial drop in value has
occurred.
• The property was financed as an interest-only
adjustable rate loan and the borrower has no
capacity to refinance at a lower interest rate.
• The property was refinanced at more than
100% of its value.
• The property is located in an area where
property values have dropped due to local
economic conditions, or the home’s value
has decreased to an amount below the loan
balance due.
• The property’s “as is” condition has deteriorated
to a point where it is not feasible for
the lender to put it in a marketable resale
condition.
• The proposed purchase price is more than the
lender would be able to sell property for after
foreclosure.
• Any sales commission proposed in a contract
is less than what the lender may typically have
to allocate after the foreclosure process is
complete to market and sell the property.

The lender will also do a market analysis of
the property. The Broker’s Price Opinion (BPO)
may be the single most influential component
the lender considers when deciding how much
they are willing to accept as a reasonable short
sale offer. The lender hires a real estate agent,
broker, or appraiser to assess the property and
give their professional opinion of its value to the
lender.
Documentation
Most lenders ask the borrower to document
their hardship prior to approval of the sale. The
lender will request at least the following information
for consideration of a short sale:
• a personal hardship letter that defines what
the hardship is and proof of the hardship
claim, if available;
• a Third Party Disclosure for authorization to
speak to the Realtor or other representative
about the loan status;
• a completed financial worksheet of net
income and monthly expenses;
• copies of the last two years’ Federal Income
Tax returns with all schedules;
• copies of last two months’ payroll stubs, or
profit-and-loss statement if self employed;
• copies of last two months’ bank statements
for all accounts;
• a copy of the sales contract signed by both
the seller and the buyer; and
• estimated closing costs showing a detailed
breakdown of all projected costs including
Realtor commissions for listing and selling
agents.
Once the lender has the above information, it
could take three to twelve months to negotiate
and close a short sale, depending on the lender.
It really is a “numbers game,” with the lender in
control.

Courtesy of Land Title Guarantee Company

John Marcotte

www.boulderhomes4u.com

720-771-9401