Why Do Banks Prefer a Short Sale vs. Foreclosure?

We’ve blogged quite a bit about the benefits of a short sale vs. foreclosure for homeowners. Short selling does less damage to your credit, is less embarrassing than a foreclosure, and actually lets you walk away with a little cash for relocation expenses. But what makes this option appealing for banks? Why should they let you walk away from a home while they take a loss?

Banks Are Counting the Cost

Financial institutions are in business to make money. Barring that, they think the next best thing is to cut losses as much as possible. That’s what approving a short sale does for the bank in many cases. The lender was counting on a steady stream of revenue from your monthly mortgage payment (since most of what you pay during the first years is the interest).

Arranging for a short sale means getting a big chunk of change back on the balance of the mortgage right away. That’s more appealing than getting small installments over the coming years if they pursue you for the outstanding balance after foreclosing. The short sale price is also likely to be more than the bank could get for selling your bad debt to a collection agency for pennies on the dollar.

Keeping Up Appearances

Having a house go into foreclosure brings a lot of additional costs to the bank. They may have to pay to have an eviction carried out. If tenants refuse to vacate quietly, this can generate bad press for the bank. The mortgage lender also has a vested interest in ensuring the property is in salable condition after a foreclosure. Homeowners who are allowed to short sell must agree to keep the home in good condition (no trashing it in a fit of rage!)

Finally, when a house is foreclosed on, it becomes the bank’s responsibility to maintain. That means yet another home to keep secure and another lawn to mow. Vacant houses are targets for vandalism which tends to drive down perceived property values for the surrounding homes as well. A drop in local housing values can drive down the eventual sale price for the house – meaning the bank gets less money anyway. With all these headaches, it’s no wonder mortgage holders would rather take the money and run in a short sale!