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's issued 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.
Understand when short sale approval letters come into play and what they should contain 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 indicate that it approves of a short sale wherein the proceeds on the sale of the property would fall short of the original loan amount. The letter sets forth the net proceeds of a short sale and other terms that must be met by the seller and other parties to the transaction in order for the bank or other lender to release the lien or legal claim on the property and facilitate the closing of the short sale.
Although a short sale approval culminates in the lender releasing the lien, the lender may or may not release the borrower from the remaining debt resulting from the deficiency or difference between what the lender was owed and what it received from the sale. It can choose either to forgive the deficiency or attempt to recoup the remaining debt from the borrower 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 borrower's obligation to their remaining debt.
How a Short Sale Approval Letter Works
When a buyer makes an offer on a property that was put up for a short sale in which the proceeds on the sale would be less than the amount the homeowners owes on the mortgage, the buyer and seller typically negotiate the offer, the seller accepts the offer, and both the buyer and seller sign the offer. But as the lender would be accepting a "short" payoff in such a transaction, the lender must approve of a short sale in order for it to go through.
This means that the seller's agent must take the accepted offer and present it to the lender along with a "short sale package" including the signed purchase contract, a hardship letter detailing why the seller can't retain the home (an underwater mortgage coupled with a job loss, for example), and a narrative detailing the local trends that necessitate the short sale.
In general, a lender will only approve of a short sale if the circumstances support a short sale and the sale price and other terms are good for its bottom line, so it will usually do a bottom-line analysis of the short sale package. If it doesn't agree with the terms of the proposed sale, it can refuse the sale, and it will usually indicate the terms that would be satisfactory for approval. But if it approves of the short sale, it will issue a short sale approval letter to the seller in response to the accepted offer.
The following is an example of a typical short sale approval 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
Requirements for a Short Sale Approval Letter
A short sale approval letter should contain everything the lender demands from the seller along with the buyer and any agents in order to release the lien and close on the sale, which can include:
- Sale price
- Net proceeds (generally the sale price less closing costs)
- Allowable commissions
- Release of debt liability
- Closing costs
- Closing date
Borrowers should also ensure that the letter specifies that the loan closed in a short sale rather than a foreclosure. This is key because a short sale may result in less of a negative impact on your credit than a foreclosure. In addition, it may take a borrower up to two years before they can apply for a new mortgage after a short sale, compared to up to seven years after a foreclosure.
However, the specific terms in a short sale approval letter depend on the lender and the loan. For example, some short sale approval letters don't address the release of debt liability at all. If the matter isn't addressed, the lender might attempt to recover the deficiency through whatever rights are available under state law, including pursuing a deficiency judgment against the borrower.
The time frame for approval can also vary by lender, with some short sales taking as long as 10 months. It's important for sellers to ask a qualified real estate lawyer to review the short sale approval letter and raise any concerns to the lender to facilitate a smooth short sale.
If you're satisfied with the letter, send a copy to each of the three major credit bureaus to avoid the more pronounced negative impact on your credit caused by an assumed foreclosure. Also, present the letter 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 acknowledge their approval of a short sale.
- It's usually issued in response to a short sale package presented to the lender by the seller's agent.
- The letter should include all the terms that need to meet for the lender to release the lien on the property, such as the net proceeds.
- Sellers who receive an approval should send a copy of the letter to the three credit bureaus to avoid the more negative credit hit of a foreclosure.