In short, an approval letter on a short sale is a document issued by the seller’s lender setting forth the conditions that must be met by the seller. Such approval letter, although not final, will list exactly the following terms and requirements:

• Approved sales price
• Closing Date
• Commission
• Closing costs
• Net-proceed to Lender
• Sellers name
• Property address

Generally, an approval letter on an approved short sale is established when the seller, listing agent and lender have already completed the paper work along with a buyer submitting a fully executed contract for sale and purchase. 

Although lenders do not approve short sales until they receive a fully executed contract, let me point out to you what steps are involved to get an approval letter on a typical short sale:

1. Seller delivers lender(s) required documents to listing agent or attorney (if attorney is handling the negotiations).
2. Property is listed by listing agent
3. Buyer/Buyer’s agent submit offer to seller’s agent/seller
4. Seller accepts offer by signing the offer making it a fully executed contract.
5. Seller’s real estate agent submits the seller’s package along with a completed HUD-1 Settlement Statement to the seller’s lender(s).
6. Lender(s) will hire a third-party to do a valuation of the property, which is referred to as BPO (Broker Priced Opinion) or appraisal.  
7. Valuation is being reviewed by seller’s lender(s).
8. Negotiations may trigger prolonging the short sale process.
9. Lender issues an approval letter with approved price, closing date and other terms that may be different to each borrower (seller).
10. Approval letter is sent to seller’s listing agent.
11. Listing agent reviews the approval letter 
12. Seller determines whether or not the approval letter meets with their approval.

Approval letters vary from lender to lender, Bank of America’s approval letter is different from SunTrust’s or Wells Fargo. Some banks may not issue final approval letter until closing, which makes the letter previously issued a preliminary or conditional approval of the short sale.

Keep in mind that the lender may continue with the foreclosure process during the time the property is being listed as a short sale and even after they sent out an approval letter, until the property is being officially sold to the buyer and the funds from the sale to the seller’s lender is wired.