A short sale approval letter is the lender's written consent to let your home sell for less than you owe. It lists the approved buyer and price, the closing deadline, what the lender will receive and how the remaining balance is treated. Signing off on it without reading every condition can leave you exposed, so each term deserves attention.
If you have an approval letter in hand, or one is about to arrive, call (415) 754-0115 to schedule your free consultation. You can also write to us through our contact page. An attorney can review the terms while there is still time to ask the lender for changes.
Why the short sale approval letter is the document that matters most
By the time the approval arrives, months of work have usually gone into hardship paperwork, valuations and buyer negotiations. It is tempting to treat the letter as a formality. It is not. The approval letter is the lender's binding statement of what it will accept, and anything it does not say can create problems later, especially about the deficiency, the second lien and the closing date.
For background on how lenders reach this point, see our article on negotiating a short sale with your bank.
Key terms in the letter and what they mean
Approved buyer, price and net proceeds
The letter usually names the buyer and the contract price, and states the minimum net amount the lender must receive at closing. If the buyer changes or the price drops after a repair request, the approval may no longer apply. Any change typically needs written re-approval.
Closing deadline
Approvals expire. Many give a fixed date by which escrow must close. If the deadline passes, the lender may require a new approval, a new valuation or both, and a foreclosure sale that was postponed could move forward again.
When the foreclosure sale date is close
An approval letter does not always stop a scheduled trustee's sale on its own. Ask whether the lender has postponed the sale in writing and until when. If the dates are tight, our guide on stopping a foreclosure sale date covers the options.
Deficiency language
This is the clause most sellers worry about. California law limits a lender's ability to pursue a deficiency after it approves a short sale of certain residential property, but the letter should still say clearly how the balance is handled. Watch for wording that reserves the lender's rights, asks you to sign a promissory note at closing, or requests a cash contribution. California law also restricts a lender from demanding extra payment as a condition of approving certain short sales, so those conditions should be reviewed before you agree to them.
Seller restrictions and affidavits
Lenders commonly require an arm's-length affidavit confirming the buyer is not a relative or business partner and that you will not receive proceeds outside the closing statement. Read it carefully. Signing an inaccurate affidavit creates serious risk.
Credit reporting and 1099 statements
Some letters describe how the account will be reported to credit bureaus or note that a Form 1099-C may be issued. These are worth noting for planning, since forgiven debt can have tax consequences.
A practical review checklist
When the letter arrives, set it next to your purchase contract and the preliminary closing statement and compare them line by line. The buyer's name, the contract price, the commission figures and the closing date should match exactly. Confirm the letter references the correct loan number and property address. Note every deadline in your calendar, including dates for providing documents to the lender after closing. Finally, check who must sign the approval or any acknowledgment form, since some lenders require every borrower, including a former spouse still on the loan, to sign before escrow can close.
The second mortgage or HELOC approval
If there is a second loan, the first lender's approval is only half the job. The junior lender must also agree to release its lien, often in exchange for a limited payment allowed by the first lender. Each approval letter should be read on its own terms, and the two should match on the buyer, price and closing date. Our article on short sales with a second mortgage explains how those negotiations usually go.
What to do if the terms are not acceptable
- Ask for a written correction. Errors in names, price or dates are common and usually fixable.
- Request clearer deficiency language. An attorney can explain what California law already provides and what to ask the lender to confirm.
- Question contribution requests. A request for a cash payment or a note is a negotiating position, not always a final condition.
- Get extensions in writing. If closing will slip, ask for an extension before the deadline, not after.
- Compare alternatives. If the terms are unworkable, a deed in lieu, a loan modification or bankruptcy may deserve a fresh look.
The Somal Law Firm handles short sale negotiation and foreclosure defense for homeowners in Pleasanton, Dublin, Livermore, San Ramon, Danville and across Alameda and Contra Costa Counties. Attorney Bob Somal reviews approval letters, communicates with lenders and explains how each term affects you. Learn more about our short sale attorney services.
Frequently asked questions
How long is a short sale approval letter valid?
Each lender sets its own deadline, and it is stated in the letter. If escrow cannot close in time, request a written extension before the date passes.
Can the lender change its mind after approving the short sale?
An approval is conditional. If the buyer, price, net proceeds or closing date change, or another condition is not met, the lender may withdraw or require a new approval.
Does the approval letter stop the foreclosure?
Not automatically. Confirm in writing whether the trustee's sale has been postponed and to what date.
Should I sign if the letter asks me to pay money at closing?
Have an attorney review that request first. Contribution demands can sometimes be negotiated, and your rights under California law may affect the analysis.
Before you sign a short sale approval, call (415) 754-0115 to schedule your free consultation with The Somal Law Firm. You can also use our contact page. We will read the letter with you, flag the conditions that matter and explain your options in plain language.
Attorney Advertising. This article is general legal information for Bay Area residents, not legal advice, and does not create an attorney–client relationship. Every situation is different — please consult a licensed attorney about your specific circumstances.