I would advise you to discuss with your attorney what your options are. This whole situtation seems a bit messy. I have heard of closing being delayed but have not heard of a situation like this before, not to say that they do not happen. Since you have already invested time and money I would suggest that you find a common ground and discuss with your real estate agent. Your attorney should be able to give you a specific number on how much more the bank is looking for and at that point your attorney can advise you as to what your options are. If you cannot offer more, you may have to walk away from the deal. But the banks are usually willing to offer a fair price but this all depends on the situation the homeowner is in.
Real Estate Agent
As for the bank approving the short sale, that depend on a lot of factors--which lender it is, how much the lender or lenders will have to absorb, what the comps are (I know you had an appraisal, but the bank will want one of its own), and more.
Even if the short sale is approved--and it may be--the question is: How long will it take? If could be as short as a month, or as long as 6-9 months. And that means various levels of inconvenience (I imagine you had scheduled the move) and difficulty (you financing commitment may well expire) ahead.
Keep in very close contact with your Realtor and your attorney to make sure that the process is expedited as much as possible.
Is the home listed with a realtor now? Wouldnt they have asked the seller what they owe, show them a estimated closing cost sheet and the seller go "hmm i dont have enough to settle the mortgage?"
Last minute things like this bother me. It should not happen. Extending settlement due to time to get some repairs I can see but this is something that should have been addressed from the beginning when the offer was made.
Village Land Shoppe
Like Michael, I'm also aware of this happening from time to time, and there are several ways to work around this.
Besides pursuing a short sale (which can take a long time), you could do a short paper. Another option, if the property appraises close to the amount of the loan (minus the amount that it would take to reinstate that loan), then you could offer to buy that property with a wrap (a form of seller financing) with the amount to reinstate that loan as your down-payment. This way you could close without worrying about your rate lock expiring.
I know I am going to get some heat for saying what i am going to say but if it boils down to a couple grand and there is enough money in the pot in terms of commissions, maybe the buyers/sellers agents can chip in to make the deal close? Now I dont know the sales price, how much commission is there etc but if it makes sense it is an option.
:prepares to get the nasty hate mail to follow:
but the way I see it is this...the deal can close if it is a couple grand apart...id rather close the deal then wait 6 months for a short sale, then eventually get paid....to me its all about my personal brand...if i have to cut back on my commission to make the deal close because there is no other way, then im doing it.
brand equity goes a long way....
Unfortunately in that situation the seller was unable to secure the answer in a reasonable amount of time from the bank and it ended up dying. It's unfortunate that you are out the money for the inspection and other costs -- you could always try and get it from the seller ... but it sounds like he's in a bad situation and you might not be able to get anything from them.
I would recommend that you ratchet up your search and if the next perfect house comes up ... you can cancel this deal and go into that one. It's not ideal ... but it's the only thing that you can do to ensure that you aren't out both money now and a house when the tax credit expires.
Do you know if there is a second lien on the house?
Truly has been one of the worst experiences and has tainted the excitement of buying our first home.