Chicago Short Sales: Why lenders allow short sales when a borrower is current

Posted on August 2nd, 2010 in Financing, Market Conditions, Other Real Estate, Short Selling/Buying.

Chicago IL – It sounds weird that a lender would approve a short sale when a homeowner is current on their payment. There is a logical reason that they do it. Let me explain.

Discover how other sellers successfully did a short sale and request a free consultation by clicking here.

Let’s look at a person who owes more than their home is worth and moves for a job transfer. Their lender does not approve their short sale. “We granted the loan thinking you were a credit worthy borrower. We expect you to repay us every dime”, the lender tells them. The borrower moves out of town and rents out the house.

Unfortunately the tenant only pays 60% of the mortgage payment. So the homeowner has to come up with $800 every month. They manage to do that for a year. Then, the tenant moves out.

Unfortunately, the tenant didn’t keep up on the maintenance of the house. Most tenants don’t treat the house they are renting as well as a homeowner would. Why should they? After all, it’s not their own home. Because of that, the home needs $5,000 in work before it can be rented again.

The carpet need to be replaced, the interior needs to be repainted, and the yard mowed. The original borrower who moved out of town doesn’t have $5,000. So what happens?

They try to rent the house in its current condition. No one wants to rent it. The homeowner manages to pay the mortgage for a couple more months. Then, they stop paying because they can’t afford to do so.

12-18 months later the lender forecloses on the house. They sell it as a bank owned property. The house sells for less than it would have back at the beginning. This is because it sits empty for 18 months while the yard gets overgrown and people vandalize it. Someone throws a brick thru the window, which allows rain to get inside and mold to grow.

As you can see, there is a financial advantage to the lender is approving a short sale for a job relocation. Lenders aren’t stupid. They hire on smart analysts to crunch the numbers and analyze these type of situations.

These analysts have lots of data to review from past loans already on the books. They can look thru 10, 20, or 100 files and see what would have reduced losses in the past. The insurance industry has number crunchers called actuaries that do a job similar to this.

Their job is to take a risk and affix a cost to it. Insurance and banking are similar in some respects. They both analyze risk and try to affix a solid cost to it. They also attempt to reduce the cost of each risk.

That is why lenders allow short sales. They have analyzed all the costs of a short sale versus the alternative. When their analysis shows a short sale will cost less than the alternative, then they will approve the short sale.

Are you interested in selling your property as a short sale? Call me at (312) 953-6725 for a free consultation. When you call, I will explain how the process works in detail and answer any questions you may have. Discover how other sellers successfully completed a short sale and request a free consultation by clicking here.

Thinking about a loan modification? Our Chicago loan modification kit has the instructions you will need to get a loan modification approved with your lender.

Thanks for reading this, Phil Buoscio.

Phil is a Real Estate Agent at Better Living Realty – Buoscio Brokerage, Inc..

Phone: (312) 953-6725.

Phil Buoscio specializes in loan modifications and short sales in Chicago Illinois. Chicago Loan Modification Help. Chicago Short Sales. Chicago Short Sale Realtor. ChicagolandShort Sale Realtor. Chicago IL Short Sales.

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