What Happens When a Bank Refuses a Short Sale

Banks face a difficult decision when a borrower proposes a short sale. Often, they will counter, trying to determine whether the bank can achieve a better outcome by accepting the shorter amount. It's not uncommon for them to low ball the offer in an attempt to see if the bank will accept it. However, if a bank refuses to accept a short sale, the borrower can find themselves in a more complex and often less favorable situation.

Reasons for Bank Rejection

Banks have various reasons for refusing a short sale. These can include:

They believe they can recover more money through a foreclosure process. The bank may feel the current market conditions are not suitable for a short sale, as it might result in a lower price than the homeowner owes on the loan. Foreclosure proceedings can take longer and cost more than a short sale, but the bank may think the delay is worth it for the recovery of a larger sum of money. The bank might have specific policies or regulations that prohibit accepting short sales under certain circumstances.

Consequences of Bank Refusal

When a bank refuses to accept a short sale, it often means the foreclosure process will proceed. This can have several consequences for the borrower:

Loss of Home and Credit Score

The borrower risks losing their home to foreclosure. The process can also significantly damage the borrower's credit score, affecting their ability to access future financing.

Legal and Financial Consequences

The bank can pursue a deficiency judgment against the borrower, meaning the borrower may still be liable for the remaining balance of the loan. The borrower may face a lien on their property, which can affect future sales or refinancing of the home.

Alternative Options

It's crucial for borrowers to explore alternative options if a short sale is not accepted by the bank. These options include:

Balloon Payment

A borrower or a third party can offer a balloon payment to close the gap between the short sale offer and the bank's valuation of the home. This can sometimes persuade the bank to accept the short sale.

Debt Settlement

Borrowers can negotiate with their mortgage lender to settle the debt for less than the full amount owed. This approach can be less damaging to the credit score compared to foreclosure.

Accepting Deficiency Judgment

If the bank pursues a deficiency judgment, the borrower can accept the judgment and work on rebuilding their credit over time.

Conclusion

Banks play a critical role in the short sale process, and their decision can have significant impacts on both the borrower and the bank itself. While a refusal of a short sale often means moving towards foreclosure, there are several options for consumers to explore before reaching this point. Understanding the process and exploring all available solutions can help mitigate the negative consequences for the borrower.