Why Isn't the Bank the Buyer in a Short Sale?
- A short sale is an agreement between a homeowner, the mortgage lender and an interested buyer. The bank agrees to allow the homeowner to sell the property for less than the remaining balance of the homeowner's mortgage loan. All of the proceeds from the sale go to the lender. The new buyer takes possession of the property with the original borrower forced to move out. In some cases, the lender forgives the remaining balance on the loan. Other lenders require short-sale sellers to take out promissory notes and pay back the difference over an extended period.
- Short sale buyers may be investors or private individuals who see a chance to buy a home at a bargain price. The short-sale process takes many months while the lender reviews financial information for both the seller and buyer before deciding whether to allow a short sale. This means that buyers need to be patient while maintaining their interest in the property. At the same time, sellers must continue paying their mortgage bills while waiting for the lender's decision.
- The lender, usually a commercial bank or investment firm, has the power to allow or not allow a short sale based on the terms of the original mortgage agreement. When a bank allows a short sale it is essentially deciding this is the best chance to get back the money it loaned for the home by accepting less than the borrower owes. Even if the bank requires the seller to pay back the difference between the short sale price and the mortgage balance, known as the deficiency amount, the bank still loses the interest money it would have earned if the borrower paid off the mortgage according to its original terms.
- Another reason that banks do not become buyers in a short sale is the option of foreclosure. If the bank decides that its best chance to get back its money is by selling the house on the open market, it can initiate foreclosure proceedings. If the borrower cannot come up with past-due payments, the bank can take possession of the home and sell it at auction. If the bank ever becomes the owner of the home, it is liable for property taxes and maintenance costs. Banks use business models based on lending money with interest, not buying and selling homes.