Challenging the Bank When Your Short Sale is Denied

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Question: A reader writes, "We had our home for sale as a short sale last year and the bank said our short sale was denied but we don't know why. They didn't really give us a reason, and our agent doesn't know why the bank denied our application. They asked us for every scrap of paper possible, and we gave them our tax returns and all financial documents that showed we are hurting financially, and they still said no to us. We can't afford to keep this home any longer.  We noticed last week that our listing has expired and our agent won't talk to us anymore. What can do do?"

Answer from Elizabeth Weintraub:

Just because the bank once denied the short sale does not necessarily mean you should not try again. The first thing I suggest is to make sure you are not in contract with the previous buyer. If your short sale paperwork was submitted to the bank, it probably meant that you and a buyer had signed a purchase contract. Most short sale contracts contain some sort of an addendum that makes the contract subject to short sale approval, and there is probably a time limit imposed as a condition of the purchase contract.

Since you legally cannot sell a home a second time when you are still obligated to an existing buyer, you should check the paperwork, call the title company (or the buyer's agent) and make sure the contract is canceled in writing, if it has not expired.

Second, if your listing has indeed expired, you are probably receiving telephone calls from many other agents offering their services and / or suggesting they have buyers for your home. These agents most likely do not have any buyers, and there is no guarantee that agents who chase expired listings have any experience in working on short sales.

It's bad enough that some agents are not qualified to sell short sales yet may offer those services, but in your particular situation, I suggest you hire an extremely well versed agent who has negotiated many short sales. An inexperienced agent without a strong background in short sales could hurt your cause and is probably why your short sale was not approved previously. Most veteran short sale agents I know don't ever give up until either the sellers drop dead from exhaustion or the short sale is approved.

Hire a new agent, put your home back on the market with fresh photographs and find a new buyer. Make sure the buyer will remain committed to waiting for your short sale approval. A little trick my sellers use is to require the buyer's agent to promise in writing that the agents will not write more offers for the buyer after the offer is accepted. Not every buyer is actually willing to commit to buy a short sale, and a committed buyer is necessary. In fact, if the buyer is not committed, you don't really have a buyer under contract. You have a worthless piece of paper.

After the preliminaries have been completed, review your hardship letter. Most banks require a seller fit one or more of the parameters required under that bank's particular guidelines to grant a short sale. Not every bank operates under identical guidelines but here are a few that apply to just about every short sale:
  1. You spend more than you make.
  2. You are getting or are divorced and cannot afford the home by yourself.
  3. The interest rate on your loan is about to adjust or has already increased.
  4. There has been a death or medical illness in the family that has caused mortgage delinquency.
  5. Your loan is in default at least 30 days from when your last payment was due.
  6. You are unemployed with little prospect of employment.
  7. You have completed a bankruptcy that has discharged all of your debts.

Sometimes, when the short sale is denied, it is due to something as simple as the seller being current on paying the mortgage. If the mortgage payments are not in arrears, the bank's guidelines might state the bank is not allowed to approve a short sale. Besides, think about it, if the bank is receiving your money, why should it consider granting you any favors at all? Second, being underwater and making a mortgage payment can sometimes feel like the equivalent of tossing $100 bills into the air to be carried away by a breeze.

If any of the 7 items above apply to your situation, make sure you include those reasons in your hardship letter. Bank negotiators handle a large volume of files, and they don't always scrutinize every single document as carefully as they possibly could. You need to make it very clear that there is a hardship, and provide documentation as well.

If you are getting divorced, send a copy of your divorce paperwork to the bank. Include invoices from your doctor with medical diagnoses or treatment plans. Itemize all of your monthly income versus outflow. Some financial statements do not provide spots or boxes for a borrower to include all expenses. Regardless of the paperwork the bank gave you to complete, create your own financial statement listing income on the left and all expenses on the right. Show a negative number at the bottom by subtracting your debts from your income. Make it very easy for the bank negotiator to clearly understand your financial picture.

Then resubmit. The likelihood is your short sale will be approved. Banks want to do short sales. The National Mortgage Settlement, among other legal actions, provides financial incentives for banks to do a short sale as does the HAFA short sale program. In fact, most banks I've worked with prefer to do a short sale over a loan modification. If you are presently in a loan modification, the odds that your short sale will be approved just shot up to 99.9%. Read how to switch from a loan modification to a short sale.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California, and does not provide legal advice. If you seek legal advice, please consult a lawyer licensed to provide it.
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