Bank Approval of Short Sale

By Stevie Duffin Updated on 7/28/2017

This article will explore the reasons why banks endorse certain short sale transactions and examine some of the common ways in which banks sabotage them.

Bank Interest in Short Sale Approval

Banks remain in business by earning a profit. Banks may occasionally benefit from a foreclosure. However, they prefer to minimize the potential losses by endorsing a short sale. A short sale must satisfy the following conditions:

• Seller submits documentation to prove hardship

The majority of bank approved short sales involve the seller undergoing financial hardship, specifically a hardship which was beyond his or her control. 

However, in these scenarios, sellers should not expect to complete the approved short sale with assets and disposable income completely intact.

• Seller accepts reasonable offers from a qualified buyer

To receive the bank's  short sale approval, the sales price should be relatively similar to relevant, current comparable sales. In some cases, the bank may attempt to instigate a higher offer by submitting a counter-offer to pressure the buyer, although ultimately the lender of the buyer must still appraise the home at the arranged price. 

Additionally, the bank may request the buyer’s proof of funding or a preapproval letter to verify the buyer’s financing before proceeding with the sale.

Short Sale Bank Denial

Banks may purposely impede a short sale by making unrealistic demands which cannot be satisfied in the transaction, rather than simply denying the sale. For example, here are several unfeasible conditions which banks demand as a contingency for approval:

• Unreasonably high sales pricing

To foreclose a property when doing so will be financially advantageous, banks will discourage a short sale transaction by inflating the acceptable price for the sale, moving it well above a realistically achievable range. This may even include an exaggeration of the broker price opinion (BPO) in some cases.

• Property occupancy

While not always the case, the pooling servicer agreement (PSA) for the mortgage could include a clause specifying that only owner-occupied properties will receive approval for a short sale. Consequently, the bank negotiator could demand that the seller moves back into the property to complete the sale, even when the seller has moved a long distance away, regardless of the circumstances behind the move. 

Knowing that the seller is unable to relocate to the property, the negotiator is not obliged to overtly reject the short sale, as the seller will not agree to the conditions.

• Seller contributions

While it is typical for a bank to request additional funds from the seller, above the sales price, the bank may demand an unrealistic amount of money for the seller contribution. To further complicate the matter, banks generally will not accept this funding from either the real estate agents or the buyer, forcing the seller to pay this fee, despite the financial hardships which may necessitate the short sale. 

Accordingly, if the seller does not possess adequate funds to pay the charge and cannot borrow it from another source, the bank will not grant approval for the short sale.
 

Ultimately, banks will not approve short sales in which foreclosure will be a more profitable option.