Often times when talking with a Seller they ask, "Why would a lender agree to a short sale?" The short answer is, "It's in the lender's best interest."

Whenever a borrower stops paying on a mortgage that loan becomes what the lender calls a "non-performing asset." It's a liability. It is money on which they are earning no interest and what's worse is that they must now put back up to eight times that amount in reserve. This is additional monies on which they earn no interest.

Since earning money is what they are in business for, the lender stands to lose less money by accepting a short sale. Then they can put the money back into circulation to earn even more money.

A study conducted in 2002 by Craig Focardi of the Tower Group estimated the entire costs of a foreclosure to the lender was $58,759 and took 18 months. You can understand why the loss of a short sale is less than the cost of foreclosure.

If the lender takes the property through foreclosure that property becomes bank owned. You have heard properties described as REO. That stands for real estate owned. The more REO properties held by the lender the worse it looks for the lender and the more reserves they must carry.

Bank owned property is a headache for the lender. Now they have to cope with property maintenance, utilities, and HOA fees. They then must list the property with a Realtor® and pay a commission. They also must insure the property and deal with the possibility of vandalism by the previous owner or others.

If I am current with my mortgage, will the lender consider a short sale?

Most lenders will NOT accept a short sale unless the borrower is delinquent. If you are only one payment behind you may only be able to speak to customer service or the collection department.

In this declining market some lenders are considering a short sale even if the borrower is current with their payments. If the borrower can demonstrate a true hardship and show the inability to make future payments, some lenders are open to negotiation.

In my next article about short sales I'll discuss the Hardship Test.

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