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.
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 would 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 that 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:
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: 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 $4,000Closing costs of $20,000Outstanding settlement costs by sellers, buyers, or agentsThe 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: Price Bank123 Wall StreetNew York, NYATTN: Price Bank Liquidations Thank you,Price Bank
Sale priceNet proceeds (the sale price less closing costs)Allowable commissionsRelease of debt liabilityClosing costsClosing 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 detail 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. 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 to try to 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.
