Why do banks delay on short sales?

[Chris Low]

Just curious why banks can take so long to make a decision on a short sale? What are they waiting for? We have a property under contract that is a short sale. We made the offer on 11/10 and the seller accepted it. It's been 18 days and we've heard nothing from the bank. I know this is common, so I'm not sweating it, I'm just wondering what goes on on the bank's end?

[Denise Evans]

The lender must evaluate the borrower to see if it is eligible. This is done through review of the financial information submitted by the borrower--usually monthly income and expenses, assets and liabilities, plus copies of bank and investment account statements, pay stubs or P&Ls for self employed, and tax returns.  The due diligence requires combing through everything to make sure there is nothing inconsistent with the financials and indicative of fraud. For example, does the borrower state he has no assets, but the tax return shows rental and dividend income? Does the borrower state his only income is from his job, but the bank statements show large deposits from other sources? Does the borrower say his car payment is $700 per month, but the bank statements show it is only $350?  All of that takes time.

Also, the bank will order a credit report and review to see if there is anything inconsistent on it. Again, does the borrower state it has no assets, but the credit report shows 3  other mortgages, which would seem to indicate the presence of rental properties. Does the borrower have a credit card with maybe $10,000 worth of credit on it? If so, the lender might demand a seller contribution of $10,000 at closing.

If there seems to be anything fishy about the tax returns, the lender will use the 4506 form to order a tax transcript from the IRS and compare it to the tax return submitted by the borrower.

The borrower must also order an appraisal. After some data entry, a computer program compares anticipated post-foreclosure net proceeds against short sale net proceeds, and produces a report.

Sometimes if the loss is large enough, the approval process must be diverted to a special group that takes a 2nd look at things.

Add on top of this: too much work and not enough people. If your paperwork gets submitted on the 1st day of the month, it might be the 20th before anybody can even take a look at it, much less do anything. Computerized tickler systems mean that if the computer automatically generates a reminder 10 days after the appraisal is ordered, the asset manager will not even revisit your file until the tickler tells him. At that point, if the appraisal is on the system, the asset manager will take the next step. If not, he will reach out to the appraisal management company with an inquiry, and calendar that forward for followup in perhaps 2 or 3 days. There is SO much work to do, nobody can rely on their memory to check things, nor can they scan down through their list of files and think about what needs to be done to move them forward. It's just not possible.

The better organized and more complete your short sale packages, the more you document any questions that might arise in due diligence, the faster the process will go. For example, if I had a borrower's tax returns with rental income, but did not show any rental houses on my assets, I'd attach a sheet saying something like, "Rental income on Schedule E of 2015 tax return was from house located at 123 Elm Street, Small Town, USA. It was foreclosed upon (or sold) on 5/1/2016. A copy of the deed is attached. Borrower no longer owns this asset, and no longer has this revenue."

After you transmit documents, call to confirm receipt 24 hours later. Some servicers require a longer lead time before things are imaged on the system, but they'll tell you that.  Also ask what the next step is, and when you should call back to check on it. In my experience, this helps keep things moving forward in a timely manner.