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Why Do Banks Prefer Foreclosure to Short Sale? Examining the Myths and Misconceptions

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If you can’t make your mortgage payments, you might feel like you have no choice but to keep struggling or give your home back to the bank through a forced foreclosure sale. However, you may have more control over your situation than you might think. People who live in Florida have certain rights and protections even when a bank or other lender is about to start the foreclosure process.

In this article, we will go into detail about the differences between a short sale and foreclosure in Florida.

Many people who are having trouble paying their mortgages and are facing foreclosure think that banks would rather foreclose than approve a short sale. This common myth keeps people from going for short sales, even though they can be a good alternative to foreclosure. This article will look at why this myth keeps going around and what banks really think about short sales vs. foreclosures.

What is a Short Sale?

First, let’s define what a short sale is. A short sale is when a lender lets a homeowner sell their home for less than what they still owe on the mortgage. This keeps the house from going into foreclosure and lets the owner pay off their mortgage, even if the sale price is less than what they owe.

In a short sale, the lender agrees to accept the proceeds from the home sale as full payment on the mortgage, forgiving any remaining balance. This can help homeowners avoid foreclosure and the credit damage that comes with it.

Why Do Many Assume Banks Prefer Foreclosure?

Even though short sales can be helpful, many homeowners who are having trouble with their finances think their lenders would rather go through the foreclosure process than approve a short sale. There are a few reasons why this myth persists .

Difficulty Getting Loan Modifications Approved

Many homeowners seeking alternatives to foreclosure first attempt to get a loan modification. However, due to strict eligibility requirements, most loan modification requests get denied. This leaves homeowners feeling like the bank wants foreclosure no matter what.

In reality, loan modifications simply have very limited success rates. Denying a modification does not necessarily mean the bank prefers foreclosure.

Low Short Sale Success Rates with Traditional Agents

Statistics show over 50% of short sales handled by traditional real estate agents end up going into foreclosure. Homeowners seeing these low success rates assume it’s the bank, not the agent, causing short sale failures.

In truth, most agents lack the skills and legal resources needed for proper short sale negotiations. Attorneys have much higher short sale success rates.

Slow Short Sale Process

Short sales take a long time to work out with the lender—often six months or more. This slow process helps keep foreclosures from happening, but it also spreads the false idea that banks only want to foreclose.

In reality, banks simply have incompetent and overloaded loss mitigation departments. Their delays don’t necessarily indicate a preference for foreclosure.

Do Banks Actually Prefer Foreclosure?

While the myths above persist, the data shows most banks actively prefer short sales over foreclosure:

  • Higher financial recoveries – Short sales bring banks more money. The foreclosure process has high costs that reduce the bank’s net proceeds.

  • Faster resolutions – Though short sales are slow, foreclosures often take much longer to complete. This ties up bank resources.

  • Loss mitigation incentives – Government and investor loan programs incentivize loss mitigation like short sales over foreclosure.

Banks approve short sales because they maximize returns while helping homeowners avoid foreclosure. In fact, many lenders have entire short sale departments dedicated to facilitating these transactions.

So why do banks make the short sale process so arduous? It mainly comes down to incompetence and overload, not a desire to foreclose. Their systems and staff can’t handle the volume efficiently.

Overcoming the Myths for Short Sale Success

While banks prefer short sales on the whole, their cumbersome processes perpetuate myths that hinder homeowners from pursuing this option. Here are some tips for short sale success:

  • Hire an attorney experienced in short sales for proper negotiations. Don’t rely on traditional agents.

  • Act fast once deciding on a short sale. Use legal resources to delay foreclosure if needed.

  • Be patient and persistent during the process. Banks aren’t trying to sabotage short sales, they are just slow.

  • Understand that receiving a low offer or having a buyer back out doesn’t necessarily kill the short sale. Multiple offers are common.

With proper representation and persistence, homeowners can increase their chances of banks approving short sales over foreclosure. This path, though difficult, is better than the damaging consequences of foreclosure.

why do banks prefer foreclosure to short sale

What Is a Foreclosure?

A foreclosure is a legal term for the lawsuit that your lending institution starts so it can seize a mortgaged piece of real property. A foreclosure will only start if the bank thinks that you have breached your lending agreement. The breach is usually caused because the borrower was unable to keep up with their mortgage payments.

In Florida, you have a right to defend your case in Court. Your lender must follow precise notice requirements and stay within a prescribed timeline under Florida law. If the lender does not follow each of these very specific requirements, then you may be able to delay or stop the foreclosure altogether.

Once the bank forecloses on your home, then they take over the property. Your home will often be sold at a judicial auction to the highest bidder, but not always. The entire process is forced upon you, which is unlike a short sale.

What Is a Short Sale?

On the other hand, a short sale does not use the foreclosure process at all. Instead, the bank will work with you to put the home on the market and sell it. The sale will usually be less than what is owed on the house, which means that the bank comes up “short” when selling it—which is where the process gets its name.

In a short sale, the bank will work with you and a realtor to ensure that it gets as much money as possible out of the sale. The benefit to the homeowner is that you can often negotiate that the money still owed to the bank after the sale (the “deficiency”) is forgiven or written off.

The bank often will not write off the deficiency in a foreclosure, which means you can end up paying a loan for a property that you no longer own. Getting the deficiency forgiven as part of a short sale can be a huge benefit in some situations.

Why Do Banks Prefer Foreclosure To Short Sale? – CountyOffice.org

FAQ

Do banks prefer short sale or foreclosure?

Discover the surprising truth: banks often choose short sales to maximize profits instead of foreclosures.Feb 2, 2025

Why would a lender agree to a short sale?

Why would a lender agree to a short sale? Not only are most lenders agreeing to a reasonable short sale offerings, they are encouraging their defaulting buyers to consider and/or pursue a short sale. They agree to the short sale so they do not have to foreclose on the property.

What comes first, short sale or foreclosure?

short sale. Preforeclosure is the first step in a foreclosure proceeding, which often happens after a homeowner has failed to make 3 – 6 months’ worth of payments.

Do banks benefit from foreclosure?

Therefore, Banks should make sure they manage foreclosed properties well if they want to sell them off or when they should sell them at what cost. Properly managed foreclosures can minimize losses and sometimes offer an avenue through which a bank can earn profits from its operations.

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