Often creditors require the borrower to prove they have an economic or financial hardship preventing them from being able to pay the deficiency.
Creditors holding liens against real estate can include Primary Mortgages, Junior lien holders—such as second mortgages, Home Equity Lines of Credit HELOC lenders, Home Owners Association HOA (special assessment liens)—all of whom will need to approve individual applications for a short sale, should they be asked to take less than what is owed.
Most large creditors have special loss mitigation departments that evaluate borrowers' applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independent evaluation of the property from an appraisal, a Broker Price Opinion (abbreviated BPO), or a Broker Opinion of Value (abbreviated BOV). One of the most important aspects for the borrower in this process is putting together a proper real estate short sale package. The package should be well organized along with a hardship letter telling the creditor why a short sale is needed.
Depending on each creditor's policy and the type of loan, creditors may accept applications from borrowers even if the borrower is not in default with their payments. Due to the overwhelming number of defaulting borrowers due to mortgage failures and other causes as part of the financial crisis of 2007–2011, many creditors have become adept at processing such short sales applications; however, it can still take several months for the process from start to finish, often requiring multiple levels of approval.
Some junior lien holders and other with an interest in the property may object to the amounts other lien holders are receiving. It is possible for any one lien holder to prevent a short sale by refusing to agree to negotiate a reduction in their payoff to release their lien. (Iowa has a procedure, sale free of liens, which allows a foreclosure court to "cram down" a short sale over the the objections of the junior creditors.) If a Creditor has mortgage insurance on their loan, the insurer will likely also become a third party to these negotiations as the insurance policy may be asked to pay out a claim to offset the Creditor's loss. The wide array of parties, parameters and processes involved in a short sale can make it a complex and highly specialized form of debt renegotiation. Short sales can have a high risk of failure from inability to obtain agreement from all parties or they might not be approved in time to prevent a scheduled foreclosure date.
The Federal Trade Commission and individual States license and regulate debt negotiators and other consultants who, for a fee, advise borrowers and negotiate loan modifications with creditors on the borrower's behalf. These consultants are required by various laws to disclose to borrowers the risks of renegotiating their mortgages and/or selling their property short. The Federal government sanctions and recommends borrowers use only HUD approved non-profit organization, who do not charge a fee for their services, however such services rarely provide short sale negotiation services. Private debt negotiators, who do short sale negotiations and also charge a fee for their service, are required in some states to be licensed, obtain a fidelity bond and insurance. They might also be limited to the amount they can charge and when these fees are due to be paid by the borrower. In many states Real estate brokers, who handle a short sale application as part of their real estate services, are often allowed to do so without additional licensing or insurance.
Due to the risks and benefits from obtaining a short sale approval, the Federal government and individual states have different and often changing laws protecting borrowers.
A short sale negotiation resulting in a reduction of the amount a borrower owes towards a debt acts as a type of settlement or renegotiation of a borrower's debt. Should the creditor report the debt reduction to credit reporting agencies it can adversely affect a person's credit report. After a short sale, borrowers may find it difficult to obtain a new mortgage as lender's underwriting guidelines might reject lending to a borrower who has obtained a short sale in the past.
As of 2011, National and State laws and industry standards for both real estate sales and lending are in an ongoing and rapid state of change. Borrowers interested in pursuing a short sale should consult first with a HUD approved mortgage counselor for up-to-date and specific advice as it applies to their situation. Also, borrowers need to obtain up to date information from multiple professionals, including an accountant, an attorney, and a real estate broker - all of who specialize in loss mitigation and are licensed to practice in the state where the real estate is located.