Buyers opt for short sales when their desire to buy the home outweighs the drawbacks of lengthy negotiating and waiting periods. In a short sale, the mortgage lender agrees to accept sale proceeds that fall short of paying off the loan balance. Lenders may withhold short sale approval for various reasons. The actions you and the seller take thereafter usually determine whether the short sale can happen.
Always contingent upon lender approval, a short sale can't happen unless the lender agrees to release the mortgage lien in exchange for a specified amount of net proceeds. Lenders use various formulas and guidelines to determine whether a short sale is in their best financial interests. A short sale is in the lender's best interest if the legal process of foreclosure proves more expensive and rigorous than allowing the seller to stay in the property and sell the home on his own. The effects of foreclosure on a seller's credit are usually more harsh than a short sale.
Lenders typically reject a short sale when they can reasonably expect the seller to repay the debt. They typically offer loan modification, forbearance or deferment options to sellers that can afford to pay back the loan to some degree. They can also refuse short sales outright, forcing sellers with the means to repay to keep making payments or go to foreclosure. Lenders usually deny short sales if the loan is current or the seller fails to prove a financial hardship. A seller facing imminent default due to an impending loss of income or increased expenses may be allowed to short sale, even though his loan is current.
The lender may counter your offer, making short sale approval conditional upon you accepting new terms. Sale price, costs and the sale date are common terms that lenders counter. The lender may counter-offer with a higher price if the home's appraised value indicates it's worth more than you offered. Lenders need to net a minimum amount to make a short sale deal work, so they often counter, or eliminate, costs that hurt its bottom line, such as closing cost credits, home warranties or other seller-paid concessions. Because sellers of short sales don't have money to contribute to the deal, the lender pays for everything out of the sale proceeds.
By accepting the terms of a counter offer, you tell the lender you're willing to do what it takes to buy the home, and it's usually able to approve the deal. By countering a lender's counter offer, you reopen negotiations, and the deal can go several ways. The lender may outright reject it, counter you again or approve your new terms. If the lender can't make a deal with you, it may allow the seller to continue marketing the home and consider a new buyer's offer. In worst-case scenarios, the seller can't get a better offer, and the lender proceeds with foreclosure to recoup its losses. When a short sale fails, some lenders may allow a seller to avoid foreclosure by signing the home over with a deed-in-lieu of foreclosure.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.