A short sale approval letter is a letter that a lender issues to the seller if a short sale offer is approved for less than the amount the borrower owes on a mortgage. It is sent by the lender at the end of a short sale to demand the "short" loan payoff in return for releasing the lien on the property.
Learn about when short sale approval letters come into play and what they should contain in order to carry out a smooth short sale.
What Is a Short Sale Approval Letter?
A short sale approval letter is a document issued by a lender to a seller to convey that it approves of a short sale, wherein the proceeds on the sale would fall short of the original loan amount. The letter sets forth the net proceeds of a short sale, as well as a few other terms that must be met by the seller and other parties involved, so that the bank or other lender can release the lien or legal claim on the property and further the closing of the short sale.
Although the goal of a short sale approval is to convince the lender to release the lien, it's not always a sure thing. The seller, or current owner, may still be in debt to the lender due to the fact that the sale deal with the buyer was for less than what was owed. The main risk of a short sale then, is that the lender may or may not choose to release the current owner from the debt they still owe on the mortgage. The lender can choose either to forgive this debt or attempt to recoup it through debt settlement or other means.
In a short sale, the release of the lien on a property doesn't always translate into a release of the current owner's duty to pay the debt that remains to the lender.
How a Short Sale Approval Letter Works
When a buyer makes an offer on a home that was put up for a short sale in which the proceeds on the sale would be less than the amount the seller owes on the mortgage, the buyer and seller have full power to negotiate the offer. If the seller accepts the offer, and both the buyer and seller sign a deal, it's between them only. This deal doesn't yet include the bank. The bank or lender would have to accept a "short" payoff in such a deal, so they still need to approve the deal in order for it to go through.
This setup means that the seller's agent must take the deal and present it to the lender along with a "short sale package." The package includes the signed purchase contract, a hardship letter that explains why the seller can't retain the home (an underwater mortgage coupled with a job loss, for example), and any other details that affect the deal, such as the current housing market climate, or local trends that created the need for the short sale.
How Will the Lender Respond?
In most cases, a lender will only approve of a short sale if all of the reasons given in the letter support it, and if the sale price and other terms are good for its bottom line. To assess the bank or lender will conduct a bottom-line analysis of the short sale package. At this point if they don't agree with the terms of the proposed sale, they can refuse the sale. Some lenders may even reply with a statement of terms that would help them approve the deal, and the owner and buyer can try again, but this is not always the case. If the lender does approve of the short sale, it will issue a short sale approval letter to the seller in response to the offer they accept.
The following is an example of a standard letter:
Short sale approval letter
Dear Jane Doe,
Price Bank agrees to the short sale between the seller, Jane Doe, and the buyer, John Hancock, and will release its lien, contingent on the following terms:
- Purchase price of $100,000, in which the minimum net proceeds should be no less than $80,000.
- Closing date scheduled on or before 12/31/20. An extension of the closing date requires the written approval of Price Bank.
- The following items paid upon closing:
- Commission of no more than $4,000
- Closing costs of $20,000
- Outstanding settlement costs by sellers, buyers, or agents
- The borrower will not receive any funds from this sale. Surplus funds above the purchase price will be the property of and made payable to Price Bank.
The mortgage will be discharged upon satisfactory completion of the above requirements. If a foreclosure action was initiated against the property, then it will be dismissed.
All payments must be paid by cashier's or certified checks, payable to Price Bank at the address below:
123 Wall Street
New York, NY
ATTN: Price Bank Liquidations
What a Short Sale Approval Letter Must Include
A short sale approval letter should contain all of the lender's demands from the seller, along with the buyer and any agents, in order to release the lien and close on the sale. At a basic level this might include:
- Sale price
- Net proceeds (the sale price less closing costs)
- Allowable commissions
- Release of debt liability
- Closing costs
- Closing date
If you are a seller, you should also ensure that the letter states that the loan closed in a short sale rather than a foreclosure. This is key because a short sale may result in much less of an impact on your credit. Also, it may take you up to two years before you can apply for a new mortgage after a short sale, compared to up to seven years after a foreclosure.
If your lender approves your short sale, send a copy of the letter to the three major credit bureaus. This could keep your credit score from getting a hit in error.
Note that the precise terms in a short sale approval letter will depend on the lender and the loan. For example, some letters don't address the release of debt liability at all. If the matter isn't laid out in clear terms, the lender might attempt to recover the money through any means they can under state law, including legal action, such as seeking out a deficiency judgment.
The time frame for approval can also vary by lender, with some short sales taking as long as 10 months. As a seller, you should ask a real estate lawyer to look over the short sale contract and letter. If you have any concerns, raise them to the lender. This alone could clear up any issues you may be confused about, or prevent any errors, to make for a smooth short sale.
If you approve of the letter, send a copy to each of the three major credit bureaus to keep your score intact. You can also keep the letter for the future, and present it to lenders if you run into issues when you buy your next home.
- A short sale approval letter is a document that a lender issues to a seller to approve a short sale.
- This letter is often sent in response to a short sale package that the seller's agent presents to the lender.
- The letter should include all the terms needed for the lender to release the lien on the property, such as the net proceeds.
- As a seller you should keep the short sale approval letter to aid with any future credit issues or loans you may wish to take out.