It is not a secret that getting a short sale approved can be a long and uncertain process, often taking 3-5 months after your offer to receive an approval letter. Why do they take so long? Is it simply bureaucracy at big banks? That’s part of the answer, but not the root cause.
I recently attended a seminar on short sale properties put on by Chase, where they described the approval process in more detail than most consumers (and their agents) ever think about. The real reasons that it takes so long are that there can be multiple decision makers behind the scenes. Let’s take a look at the main reasons that short sales are so slow.
Seller information packet delays
To sell your home as a short sale, you must apply for it as the seller. You can’t just say “I owe more than I can sell it for, let’s do a short sale.” To formally begin the approval process, the bank or banks must receive a complete application packet from the seller, in addition to the offer. This includes a hardship description, tax forms, pay stubs, etc.
Short sale sellers are notoriously slow at submitting this information, and the process doesn’t actually start until it is submitted. It could take weeks for the seller to get them everything they need, so if you are trying to buy a short sale, make sure that your agent pesters the seller to get this done in a timely manner. Nothing will happen with your short sale offer until this is complete.
Just because you pay your mortgage to Bank of America does not mean that they own the loan. In fact, they are likely just servicing the loan on behalf of loan investors like Fannie Mae, Freddie Mac, or other mortgage investment funds.
When a large bank is servicing a loan, it is given “delegated authority” to make decisions on a short sale. The investor on the loan will say “If you get a short sale within this price range, go ahead and approve it. If it is out of that range, send it to us and we’ll decide.” Each loan investor has different documentation and approval requirements, so the bank has to submit to them for a decision.You may or may not be able to find out exactly who owns your loan, though even if you do, it is unlikely that you will be able to contact them to expedite their decision.
2nd mortgages and liens
If there are two mortgages on a property, the second mortgage holder must also approve the short sale. Usually the amount they are owed is being totally wiped out, but the practice right now is that most of them will allow a short sale to proceed with some token payoff of the 2nd lien. Could be something like $5000 or 10% of the unpaid balance. Sometimes that will match what the 1st mortgage is allowing, and sometimes it will not.
Other liens can also be problematic and require negotiation during a short sale approval. If there are tax liens, utility liens, contractor liens or other private party liens, those parties must agree to release their interest in a property for a successful sale to occur. Many will agree to negotiate, but this adds time to the process.
Mortgage Insurance (PMI)
Many loans may have a mortgage insurance policy against them. As a consumer, this is where you pay Private Mortgage Insurance (PMI) as part of your monthly payment to protect your lender in the case where you default. Sometimes there are hidden mortgage insurance policies that your lender took out on your loan behind the scenes to protect themselves.
If there is mortgage insurance on your loan, the mortgage insurance company is yet another party that must approve the short sale, since they may be paying a claim to the lender because of your default. More approving parties = long processing times.
Tips for a faster short sale approval
There are strategies that can help expedite the approval of a short sale. The most important one is to make sure that the seller is motivated to provide the required information to the bank quickly. This means that the short sale approval packet is submitted with, or shortly after, the completed offer. This also applies during the process. If the bank wants more information (pay stubs, bank statements, letters, etc.) provide it as quickly as you can. Complaining about or fighting their requests isn’t going to help. They need the documentation for a reason. The same applies to anything requested from the buyer. If the bank wants documentation signed, every day it takes you to respond is a day further away from an approval.
Going into a short sale, you also want to understand how many liens there are against it, as this can have a direct impact on how long the process takes. One or two mortgages are commonplace, but if there are other liens, you need complete visibility on what those are and the likelihood that they will release the lien.
The process remains bureaucratic, and big banks remain overloaded with short sales, but approval times have improved and banks are motivated to successfully approve short sales, rather than foreclose on the home. Whether you are a buyer or a seller, working with a real estate agent who has a track record with short sales can make the process go smoother.