I think we should all bear in mind that the short sale process is really a sealed-bid form of auction. The real problem with the whole short sale process is that the lender, the "3rd party", is in total control and, yet, the lender is not a party to the contract of sale.
I have never personally seen either a short sale or a contract to buy a REO ( lender-owned )property succeed in going to closing with any type of contingency at all, except for an appraisal contingency, but that's just my experience. Have your experiences been any different?
We should all bear in mind that all these bank bailouts, financed with our tax dollars and borrowed money, left the same people who got us into this mess still in charge, and we should be forewarned as to what to expect in dealing with them. This month's VAR magazine, Commonwealth, has an article on page 10 on lender misbehavior in short sale situations, which I commend to you. It concerns second trust holders in cahoots with settlement agents trying to induce buyers to pay fees to the second trust holder that are not to be shown on the HUD-1 settlement statement.
To get to the approval letter issue, if the contract was contingent for a fixed period of time on getting a loan approval satisfactory to the seller, and the time for the satisfaction of the contingency had expired, then the contract might well have been voidable at the seller's option. I just hope that this response is clearer than mud; the whole short sale process to me is just about as transparent as that substance.