Do I Qualify For A Short Sale?

This is a question I’m asked almost daily and while my answer is usually yes, it is becoming an increasingly difficult question to answer.

The general assumption has always been that in order for a lender to consider a short sale, the borrower need be experiencing a significant hardship – health issues, loss of employment, etc. However, there is a broad grey area that seems to be growing by the day and it’s sucking more and more people in that might not have been short sale candidates in the past.

For many homeowners, the hardship has become the market itself. They may have borrowed responsibly, paid on time and done everything that a lender might request of a borrower, but property values have dropped so far below what anyone could have possibly anticipated, that when it comes time to sell - unless they can cover the deficiency out of pocket - they’re stuck.

Generally speaking, lenders will approve 85% of the short sales we submit – not because they feel bad or have empathy, but because it’s a wise business decision. The foreclosure process can cost a lender tens of thousands of dollars, if not more. Aside from legal costs and costs to maintain the home, they also have to try and re-list/sell it in a still depreciating market. If the borrower is close to insolvency, they run the risk of not being able to recover those costs, since it’s difficult to take from someone what isn’t there.

With a short sale, they can bypass all of those issues.

Naturally, if someone has a high income/significant assets and is looking to short sale their home – for no reason other than they’re tired of throwing good money against bad – but wants to walk away without any liability, well, that would be a person who likely doesn’t qualify. And that person is overwhelmingly in the minority.

Still, there are instances where banks are either rejecting short sales or making re-payment requests that we find puzzling. Of the 15% or so that are rejected (either by the lender, or if our client doesn’t like the lenders terms), here are a couple examples where health and job loss aren’t issues:

A client of ours was relocated for her job, from Michigan to California. Her property value has been sliced from around $115k when she purchased, to the most recent offer we’d received for $30k. She makes a decent living, but doesn’t have enough to cover the $85k deficiency, so her options were as follows: keep paying, mail in the keys or attempt a short sale. Unable to find a renter, she decided on a short sale. Unfortunately, her lender would only approve it if she agreed to pay back almost the entire balance– which really, means it’s no longer a “short sale”.

By essentially rejecting the short sale – they saw her financial information and are aware she can not afford the $700+ monthly payment they requested – the lender will pay a lot of money in legal/maintenance costs, but likely won’t get anywhere near the offer we brought them (keep in mind, we’re in Michigan which means they’ll have to wait out a 6 month redemption period before they can ever consider listing it for sale). Additionally, they will have an extremely difficult time pursuing our client due to jurisdictional issues, since she now lives out of state.

On the other extreme, we recently had a client who requested a short sale simply because they feel they can’t afford their home anymore. Their family has grown, but like many people, their income hasn’t followed suit and it’s placed a significant strain on their marriage. The home is currently worth well below what it was when they purchased.

To digress for a moment, it’s long been the belief of people who borrow responsibly that if something were to go wrong, they could always sell – if not for a profit, at least to break even – and I think the majority of homeowners would agree with that sentiment. Enter the current housing crisis and I ask you, now what? Is it a realistic expectation that people are going to stay in their homes for 30 years and never have a bump or two in the road that might affect their ability to pay?

Regardless, the lender looked at their information (hardship letter, income, bank statements, etc) and determined they weren’t candidates, because the hardship wasn’t “significant”, they made too much money and they weren’t delinquent on their payments.

Now, the whole idea of not working with someone on a short sale because they are paying on time is insane to me. Someone is scraping by, continuing to honor their obligation to their lender and for that reason the lender doesn’t want to work with them? Crazy, but that’s a blog for another time.

In the case of this couple, the lender does make a point about their income. However, our client understood that and was willing to pay back a portion of the loan via a cash contribution or a promissory note. They didn’t have the money to pay it all down, but that was the only option the lender would accept, so we walked. Since this is Arizona, the lender cannot pursue our client for the deficiency, so essentially they’re gambling that they’ll be able to get a better offer on their own, than the one that we’d already submitted – an offer that was slightly above fair market value.

I’m confident that our clients will do the right thing when they walk away from the home and leave it in excellent condition. Most would not though, leaving the lender to either pour money back in to the home to make it marketable, or sell it for less due to the damages. All of this could have been avoided.

In both examples, our clients had decided they could no longer keep their homes, but their respective lenders felt otherwise. By declining to work with their customers, the lenders have unnecessarily cost themselves considerably more money. It’s our hope that one day soon, they’ll begin reversing this trend on a more consistent level.

In the meantime, if you’re considering a short sale move forward with it. The odds are in your favor that you do qualify and that your lender will work with you – especially once they’re received an offer…