How Much Will a Bank Forgive on a Short Sale?
When a bank agrees to a short sale, this means the bank gives permission for the borrower or property owner to sell the property for less than the balance due on the property loan. In some cases, the bank forgives the unpaid balance and does not hold the seller responsible for paying the difference between the loan balance and the sale price. In other cases, the bank issues a deficiency judgment against the seller after the close of escrow and attempts to collect the unpaid amount from the seller.
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Seller Responsibility
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Distressed sellers are often under the impression that if a bank agrees to a short sale, they are also agreeing to forgive the unpaid balance. This is not always the case. In many instances, the bank is just agreeing to release the property as collateral and intends to hold the seller responsible for the unpaid amount. It is in the best interest of the seller to consult with an attorney and accountant before proceeding with a short sale and to obtain in writing from the bank the seller's obligation after a successful short sale.
Each Bank Is Different
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While the short sale process is similar for banks, there can be differences among banks. Each lender might have its own unique short sale procedure and policies; and while one bank may have a financial motivation to forgive a large amount, another may not. Not only do short sale procedures vary by bank, a lender might look differently at one borrower than another. If it feels the borrower has the means to pay the unpaid amount, the bank may be more prone to proceed with collection.
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Amounts to Forgive
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Before a bank agrees to a short sale, the lender normally requires the property owner to show the property value has dropped to below the loan amount. If the current property values are above the loan amount, the lender will be unlikely to allow a short sale. Generally, the amount the bank may consider forgiving is the difference between the property value and the loan amount. Yet, some banks may forgive more and others less, while some lenders may agree to a short sale and still hold the borrower responsible for the entire difference.
Foreclosure Vs. Short Sale
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When liquidating real estate, a short sale can be less costly for the bank when compared to a foreclosure. The federal government encourages short sales over foreclosures, as foreclosures tend to bring down property values more than short sales. This is because short sales tend to be occupied and maintained properties, while foreclosures appear abandoned, and often damaged. When deciding how much to forgive in a short sale, the bank may compare what it will cost it to foreclose and liquidate as opposed to cooperating with the borrower in a short sale.
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References
- Photo Credit House for sale image by Heng kong Chen from Fotolia.com
