A bank short sale is the last resort to avoid foreclosure after other options such as refinance and loan modification have been exhausted. Because of the drop in home value, sale proceeds are certainly to be short of what is owed on a mortgage. A short sale essentially is a mortgage settlement in which the bank agrees on an amount less than the outstanding mortgage, and the debt is forgiven. The homeowner may initiate the short sale process by contacting the bank's short sale department, but the bank makes the related decisions as to whether accepting a short sale application, proceeding with a purchase offer and finally approving the short sale.
After an appraisal is ordered, the bank will notify the seller that the bank would like to proceed with the short sale. But the bank won't order an appraisal until the seller has submitted a purchase offer made by the potential buyer and the bank thinks the offer is viable. The notification will let the seller know whom the bank has appointed as the appraiser and when the appraiser will contact them to conduct the appraisal. The seller should provide access to the property in a timely manner.
To evaluate the buyer's purchase offer that the seller submitted, the bank must first decide on the property's fair market value. In a short sale, instead of ordering a full appraisal, banks often request the so-called broker price opinion, BPO, from one of the bank's agents working on the bank's other foreclosed homes -- a speedier and simpler evaluation on market prices. After the bank has received the appraisal results, it will compare the purchase offer against the market value. Most banks accept offers with a purchase price at about 90 percent of the market value.
If there is any question about the market value, the bank may order another BPO. After the bank has determined that the purchase price is aligned with the bank's appraised fair market value, further negotiation will continue. The bank may provide its counter offer outlining terms for a possible settlement. If the mortgage has been sold to outside investors, the negotiation also involves communication with holders of the mortgage-backed securities. The seller needs to provide more information at this stage such as income verification, explanation of his inability to make mortgage payments and any relevant information about the buyer.
Once all parties to the negotiation have agreed to the terms regarding the short sale, the bank will approve the seller's short sale application. After accepting the offer, the bank gets a copy of the final purchase contract and begins to process and close the borrower/seller's mortgage. Following the settlement, the bank sends reports to the credit bureaus stating that the loan is paid by means of settlement, which will negatively affect a person's credit rating but to a lesser degree compared to a foreclosure. The amount of mortgage forgiven by the bank is treated as taxable income to the short-sale seller unless stated otherwise.
- Trulia: What Happens After an Appraiser Comes Out to the Short Sale Property
- Experian: Impact of Mortgage "Short Sale" on Your Credit Report
- Quicken Loans. "The Short Sale Explained (No, It's Not the Same as a Foreclosure)." Accessed May 8, 2020.
- National Association of Realtors. "The Short Sale Workflow." Accessed May 8, 2020.
- U.S. Securities and Exchange Commission. "Pooling and Servicing Agreement." Accessed May 8, 2020.
- Specialized Loan Servicing. "Short Sale Affidavit." Accessed May 8, 2020.
- Richard Adams & Associates, P.A. "Sample Short Sale Hardship Letters." Accessed May 8, 2020.
- Keller Williams. "Short Sale Package." Accessed May 8, 2020.
- Freddie Mac. "Buying a Short Sale Property." Accessed May 8, 2020.
- Marily Pastran. "Don't Fall Into Traps When Buying a House: Real Estate Investment Education," Page 43. Xlibris Corporation, 2011.
- Reid Real Estate Group. "How Long Will My Short Sale Take?" Accessed May 8, 2020.
- Realtor.com. "What Is a Short Sale? The Benefits for Buyers and Sellers." Accessed May 8, 2020.
An investment and research professional, Jay Way started writing financial articles for Web content providers in 2007. He has written for goldprice.org, shareguides.co.uk and upskilled.com.au. Way holds a Master of Business Administration in finance from Central Michigan University and a Master of Accountancy from Golden Gate University in San Francisco.