One reason is they feel that the price agreed upon by the buyer and seller is too low. The bank will do their own appraisal, which may or may not be an accurate estimate of current value, and make their decision based on that. Unfortunately, sometimes sellers and their agents market the property at a price that is too low thinking that the bank will approve any price they submit.
A second reason is that they feel that there is not a hardship on the part of the seller. If the seller has not missed payments and/or shows enough income to make the payments, the bank will not approve the short sale.
A third, less frequent reason is that the bank feels that the sale is not an arms-length transaction and that there is fraud involved in the sale. Also the bank will not allow any of its employees to be a buyer of a property that they hold the loan on.
The other main reason I've seen short sales rejected is the bank does not feel the seller has a verifiable hardship. They look very carefully at income. I've had a couple of short sales turned down personally. In these cases, one couple made a little over $100K...which is not a lot to raise a family in San Diego - but the bank deemed that income as 'Not a Hardship.'
The other area I've seen rejected is when a seller is short because he/she cashed out their equity. The banks feel (rightfully so) that the sellers took their equity and now expect the bank to pay for it.
Hope that offers a little more insight...
1) The bank is too busy and just can't get to it. This happens more than we like.
2) The offer price is not close enough to what the bank thinks is market value. I have heard multiple times that a bank is looking to get at least 88% of market value.
3) The bank does not think that the rest of the terms and conditions (other than price) are attractive relative to other options.
4) The bank does not think that the Seller is in a real hardship situation, and that they think they can get the Seller to make good on their mortgage.
These are the ones that come to mind for me. Anyone else?