The short sale process in which a home sells for less than the amount owed on its mortgage is known for being drawn-out and arduous. Short sales became a significant portion of the housing inventory in 2008, as a result of the sub-prime mortgage market collapse. To make an informed decision, buyers must weigh the benefits of a short sale with its main drawback, the waiting period for lender approval.
The lender of a short sale home agrees to accept less than its initial investment on the loan. It must determine whether the seller has a legitimate financial hardship and can no longer continue making his payments before agreeing to the sale. When short sales became popular in large numbers, lenders had difficulty handling the volume and lacked the staffing to efficiently process them. As such, waiting periods of more than one year were not unheard of.
In 2009, more than 90 percent of agents cited a slow response from the lender as the reason short sales were lost, USA Today says. Potential buyers often walk away from a deal if months pass without a response from the lender or negotiations with the lender stall. With each deal that falls through, the lender may require a new offer to continue with the process. in such cases, each time the lender must consider a new offer from a different buyer, the short sale process is delayed.
Although many sellers and their real estate agents cite lost documents and unreturned calls as the common causes of lengthy short sales, delays are not always the lender's fault. Inexperienced real estate agents who fail to turn in complete paperwork also hold up the process, as do severely underpriced homes, USA Today says. Lenders order appraisals known as broker price opinions to determine fair market value and the minimum sales price it will accept. By submitting an offer far below market value, the lender is forced to reject or counter the offer, further delaying approval. The additional coordination required between a second lien holder and the first lien holder may also prolong the process. Both may issue approvals at different times, with separate sale deadlines, which can cause an entire deal to fall through.
In most states, foreclosure takes several months, giving sellers longer to negotiate a short sale with their lender. In judicial states like New York and New Jersey, a hearing is required before foreclosure can take place. In these states, it takes about 1,000 days for the bank to legally repossess a home. Additionally, some lenders have sped up the approval process by requiring less paperwork to prove hardship for homeowners who have not made a payment for months on their primary home, Bloomberg says. In all of these cases, seller monetary incentives to short-sell their home can be several thousands of dollars.
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