What is a Short Sale Approval Letter?
Learn how to understand a short sale approval letter
Short sales happen when lenders allow owners in distress to sell their homes for less than they owe on the mortgage. Apart from getting the short sale approval letter, sellers and buyers don't share common goals during a short sale. To get the bank to approve the short sale and to lessen the deficiency if any, sellers generally want the highest price offer. Buyers submit low offers on short sales which puts the two parties at odds. The parties to a short sale often sign an arm's length affidavit that keeps them separate.
But somehow short sales come together -- generally with a bit of luck and a lot of prodding. All of it is in pursuit of the short sale approval letter.
The time period in which a bank processes the short sale and generates the approval letter can range on average from two to three days for small banks three to four months for major banks. Approval depends primarily on the investor.
Short Sale Approval Letter Contents
The short sale approval letter spells out exactly what the bank expects from the seller. It lays out the following terms, among other considerations:
- The acceptable sales price
- Maximum allowable commissions
- Maximum closing costs
- Minimum net proceeds
- Closing date
Not every short sale approval letter contains a release of liability. In fact, some approval letters don't address a release of liability at all. Lawyers say that if the matter is not addressed, then the lender might retain whatever rights are available to the lender to pursue a deficiency judgment under federal and state law.
Short Sale Approval Letters Vary Among Banks
Every bank has attorneys and they are the ones who draft the bank's short sale approval letter templates. Most short sale approval letters are created by lawyers. The letters contain language about how the loan will be reported to credit agencies, whether a 1099 will be issued and whether the sellers can later sue the bank. Of course, the bank might reserve the right to sue the seller. That's why it's very important for sellers to ask a qualified real estate lawyer to review the short sale approval letter before accepting its terms and conditions.
For example, a letter issued for a Bank of America short sale might be different from a Wells Fargo short sale approval letter, depending on:
- Whether the bank releases the seller from personal liability
- The position of the existing loans
- The loan's origin
Further, a bank's short sale approval letter issued one month might be different from one issued six months later. Often, extensions, if granted, are not a rewrite of the existing short sale approval letter but are an amendment or supplemental to the original approval. Some banks don't issue the final short sale approval letter until closing. The document issued in advance is often a preliminary or conditional approval of short sale.