Short Sale Terms

Below is a glossary of common short sale terms.


An appraisal is typically ordered by the short sale lender after a contract is received.  In most cases, the lender doesn’t know what the property is worth until they order a property valuation, which may be an appraisal or BPO.  Appraisals are usually more expensive than BPOs, costing the lender several hundred dollars.

Approval Letter

A lender’s approval letter spells out all the terms of the lender’s acceptance of the short sale.  Such terms typically include the net payoff to the lender, any amount allowed to junior lienholders, real estate commissions allowed, and an expiration (the date by which the closing must occur).  The letter may also contain language requiring a cash contribution or promissory note from the seller, or it may state that the lender is agreeing not to pursue the seller for the deficiency.

Broker Price Opinion (BPO)

A BPO may be an exterior (“drive-by”) or an interior valuation.  These are typically performed by licensed real estate agents as opposed to a licensed appraiser.  They typically cost lenders $50-$100, so many lenders will opt for them instead of appraisals.

Cash Contribution

Depending on the situation, a lender may require money from the seller at closing in the form of a “cash contribution.”  This may be a discounted figure when compared to the actually shortfall between the net payoff and the loan balance.

Deed-in-Lieu of Foreclosure

In a deed-in-lieu, the borrower cooperates with the lender to convey the property back to the lender.  This is typically much less expensive for the lender than going through a conventional foreclosure process.  Because a deed-in-lieu still results in debt forgiveness, any borrower considering a deed-in-lieu should consult with an attorney and tax professional before agreeing to a deed-in-lieu.

Deficiency (and Deficiency Judgment)

Deficiencies are a complicated matter, and well beyond the scope of this website.  Therefore, an attorney should be consulted any time a borrower is looking at the possibility of a deficiency.  But in short, a deficiency is the difference between what is owed on the debt and what is actually paid.  Suffice it to say that deficiencies do not simply disappear because a short sale is accepted.  The issue of what happens to the deficiency should be negotiated by an attorney and spelled out in the approval letter.  The opportunity to negotiate a full satisfaction of debt is one of the biggest advantages of a short sale compared to foreclosure.

Hardship Letter

The seller’s hardship letter explains to the lender why the seller is no longer able to make their mortgage payments, or why they will soon be able to make them.  This letter should be honest and heartfelt.  Common themes throughout hardship letters include job loss, decline in business, illness, bankruptcy, and death of a spouse.

HELOC (Home Equity Line of Credit)

Many homeowners have HELOCs, which are often in 2nd position behind the primary mortgage.  HELOCs can throw quite a monkey wrench into a short sale negotiation.  Even though a 1st mortgage will typically allow a certain amount of money to go to the 2nd, the 2nd is likely to demand more.  Additionally, HELOC lenders may not be willing to waive their rights to a deficiency, which again illustrates the need for a competent attorney.


According to the IRS website:

A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may be excluded as income under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. For more information, see highlights of the Mortgage Forgiveness Debt Relief Act.

Obviously, a tax attorney or CPA would need to get involved if a borrower wants to claim insolvency.


Many, if not most, residential mortgages have been re-sold in the secondary mortgage market.  The new owner is the mortgage investor, who will have the final say in a short sale approval.  The investor could be Fannie Mae, Freddie Mac, an investment group, a private hedge fund, or just about anybody.

Junior Lienholder

Junior liens can be HELOCs, property owners’ associations, property tax liens, mechanics liens, and the like.  All will need to be addressed during a short sale negotiation.

Lien Release

A lien release is just that…it allows the property to be sold free and clear of liens.  This is great for the buyer, because they can buy the property with clear title and should be able to obtain title insurance.  However, a lien release is not necessarily a satisfaction of the debt.  Again, an attorney should be consulted when discussing lien releases versus full satisfactions.

Preliminary HUD

The preliminary HUD (closing statement) is part of the short sale package that is submitted to the bank along with the contract, hardship letter, etc.  This should be done by an attorney.  Many real estate agents think it is their job to provide this to the lender, which is not a good idea.  Agents don’t prepare HUDs for conventional transactions, so why should they prepare one for a short sale?  Even though the preliminary HUD is initially being presented to the 1st lienholder, it should include payoffs for junior liens as well, which means a title search must be performed to discover any and all liens.  How many agents do you know that run their own title searches?

Promissory Note

A promissory note may be required of the borrower in order for a lender to approve a short sale, but the terms can sometimes be negotiated.


The mortgage servicer may not be the same entity that owns the mortgage on a property.  Even though a short sale is successfully negotiated with the servicer, it may still be subject to approval from the investor.

Short Sale Package

Different lenders have different requirements, but a typical short sale package will include the purchase contract, seller’s hardship letter, and seller’s financial documents.  Additional requirements may include the buyer’s proof of funds or pre-approval letter.