Short Sale v Short Payoff…What’s the Difference?

In an earlier post, Short Sale v Foreclosure, we saw the difference between a short sale and a foreclosure, but there is another option for a distressed  homeowner. This is the Short Payoff. This option makes sense only under special circumstances.

What’s the difference between Short Sale v Short Payoff?

In our current real estate environment, short sales are becoming more common. A short sale occurs when  the lender or investor agrees to accept an amount less than actually owed on the property. The lender sells the property “short.” In this case, it’s up to the homeowner, usually using a real estate agent, to market and sell the property. The new buyer usually gets a bargain. The previous homeowner gets out from under an unmanageable mortgage by giving up the house.

In order to qualify for a short sale, generally speaking, the homeowner must demonstrate a verifiable long-term hardship rendering him unable to pay the mortgage. These days,  many homeowners, especially those who bought within the last several years or those who refinanced and took big chunks of equity out of their properties, becoming “upside down” in their home loans or owing more than the home is worth. Now, more and more often, these homeowners are also doing short sales.

So far, this doesn’t sound like such a bad deal. The house I bought loses value, so I sell it at current market rates and the lender takes the loss. Well, true, but the homeowner no longer has a home. And, the former homeowner will probably be a renter for several years to come as his credit report’s FICO score will immediately drop by about 300 points. The newest loan guidelines from Fannie Mae and Freddie Mac specify that after a short sale, a prospective borrower must wait for 2 years to qualify for any  FHA- or government-backed loan.

So, what’s the alternative that will NOT damage credit to such a degree?

That option is called a Short Payoff. It also carries some tough restrictions. If the homeowner is upside down by a smallish amount, say $10,000 to $50,000, depending on his  financial perspective, he might try to negotiate a short payoff with his lender.  In this scenario, the lender agrees to release the lien, his interest in the property, allowing it to be  “conveyed” or sold to a new owner.  The lender agrees to accept less than the amount owed on the property to release the lien, thus “short payoff,”   However,  in return, the former homeowner signs a promissory note for the difference or some of the difference agreeing to “pay off ” this unsecured line of credit according to the terms of the note.

To do a Short Payoff, the mortgage must be  current, the borrower must have  great credit, and must demonstrate the ability to pay off the debt.  The upside of this situation? The former homeowner keeps his great credit and can purchase another home or anything else he desires.

When is a  Short Payoff appropriate? A homeowner might  request a short payoff when the home has lost value dramatically or even just enough to make it impossible to sell, and he does  not have the ability to pay the large amount to get completely out of the property.

Not all lenders will allow for a Short Payoff; however,  you will never know if you never ask.
Of course, the advantages of short Pay-offs are the borrower are able to move out of the property and get on with his life, there SHOULD receive no negative feedback on the former homeowner’s  credit.

If for some  reason down the line, the borrower’s  ability to pay changes and cannot pay on the note, the credit ramifications are significantly smaller.

For further clarification of the entire short sale, foreclosure and short payoff differences, I have just posted an E-Book, Should I Short Sale My Home or How To Survive the Worst Real Estate Market in History, available as a free download, on my website. Plus, it appears in Links to the right of this post.

55 thoughts on “Short Sale v Short Payoff…What’s the Difference?

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  3. Where the seller can and will cheat you is with the leases.
    In many cases only a few months without rent can wipe out all projected net income on the
    property for the entire financial year, or even cause an overall loss
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    They were dressed stylishly, moved with grace, were good-looking, and barely talked or looked at each
    other the entire time I saw them at the restaurant.

  4. I’m amazed, I must say. Seldom do I come across a blog that’s equally educative and entertaining,
    and let me tell you, you’ve hit the nail on the head. The problem is something not enough men and women are speaking intelligently about. I am very happy that I found this during my hunt for something regarding this.

  5. Have you ever thought about creating an ebook or guest authoring on other sites?
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  6. Diane, My husband retired on 6-1-12 he recvd a lump sum for part of his retirement of $15,000. we called our bank and were told they would accept a short payoff of the $15,000 as pyment in full.
    We have recvd a letter telling us our loan is pd in full and with it came the original satisfaction/full conveyance document for the mtg loan. Our letter says mtg loan pd in full. We did not have to sign any promissory note. Does this sound right to you what I am reading makes our arrangement scarry please advise

    • This sounds legit. It you like, send me the letter from the bank and I’ll scrutinize it. Some banks are doing this, especially in hard-hit states such as Michigan.

  7. Pingback: New Hope for Those in Trouble? | Zillow Blog

  8. Hi Diane,

    Big fan of the blog and first off would like to thank you for all the helpful info. I have a quick question, any update on what lenders are willing to participate with the short payoffs? So far I’ve found Citi, Litton, Wilshire and heard rumors of BoA entertaining it.

    Thanks a million,

    Bernie

  9. Hi Diane,

    Big fan of the blog and first off would like to thank you for all the helpful info. I have a quick question, any update on what lenders are willing to participate with the short payoffs? So far I’ve found Citi, Litton, Wilshire and heard rumors of BoA entertaining it.

    Thanks,

    Bernie

  10. What happens if…. instead of paying my mortagage as billed (principle, interest, escrow) with a single payment (online or check)…. I instead…
    1) Make the payment with 3 checks
    1 check for the correct escrow amount
    1 check for the the principle but… instead of the correct $207 I make it $707
    and
    1 check for the interest and …. instead of paying the correct $685 for interest, I pay only $185.
    AND
    on each check i make note in the info line of the check that the amount is expressly for escrow, principle, and interest???
    Must they apply the payments accordingly?
    Can I (by doing this) short pay them on interest and apply extra to principle.
    And
    Is there anything the lender can do about it legally?

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  13. my home is upside down Iam 30%over fannie mae I tried a modifity loan but no program for me and I’ve never been late My interest is high 8.5%. Iam retired and the only reason Iam able to continue to pay is because my retirement income is enough to pay mortgage my pay off is 275,000. I have a little help from my son to survive . is a short pay off good? for me In all honesty I want to walk away. my fico score does matter any more. Iam so stress!!

  14. Diane,
    We want to short sell my husband’s home in Covina, which is a rental, that went unrented for many months. He was behind 90 days with the mortgage, which he is currently trying to repay at a higher rate of 1 month + 1/4 month payments. It is extremely difficult for us to pay this, as we still have no renters. Should we stop making payments in order to better build the case that we need to sell our lil money pit???

  15. I’m a listing agent, doing a short sale, AHM is saying they will approve my short sale, prior to my sellers signing a promissory note, for 140K and 389.99 a month. My sellers declined, I don’t blame them!! Can this be negotiated down? How do I work around this situation to get the lender/investor approve such a thing. The hardship letter is very strong and clear why he can’t make the payments.

    Thanks.

    • Not having all the details, I have no real answer, but a negotiator recently approved a sale and then came back and said the second lender wanted $3300 suggesting the other agent and I should contribute! I said no and explained why, also stating I did want the deal to go through. A few days later the deal was approved without the agent contribution. Moral for me is stand strong! It could well be a bluff. Remind the seller/bank how much it has to lose by letting the property go into foreclosure and how long it will take to get it off their books…

  16. Pingback: Newbie and Question about short payoff/sale - Loan Modification Forum - LoanSafe.org

  17. I live in Phoenix Az,and I am negotiating a “short payoff” does that mean I will lose my home and have to move out, or can I stay and continue to make a short payoff payments.
    Thank you for your time in this matter

    • That term “short payoff” sometimes means a short sale in which case you would be selling your home and moving out. However, it usually means a refi or a cash to loan payment. Are you negotiating with the bank yourself? If so, you must know what you asked the bank to do for you. If not, what did you ask your intermediary to do for you?
      For you to move out, you must’ve signed a purchase offer with a buyer. Did you do that?

  18. I have a borrower that I would like to get a short payoff from AHMS…SHe owes 560K and with prepayment penalty and deferred interest from the first year she let it negatvely amortize, the payoff refi amount would be 610,000. The property was appraised @500K..SHe is full doc, excellent income and assets..recently divorced, She is Dr. and wants to see if I can get AHMS to accept a short payoff and allow her to refinance with an FHA loan on the 500K..They would have to eat 590K, assuming they would not even look at the prepayment penalty..Does anyone have a clue if this will be accepted..wants to stay in home, but right now is not worth it..She is in adj, and the monthly is becomng a noose around her neck..Credit score is great no lates and income is very good. What ya think

    • n response to your question, I have no way of knowing if any bank would accept a short pay. The only way to find out is to ask.
      Most likely you would approach the bank with a variety of options, such as loan mod or short sale and settle on a short payoff. If your client has good income and good credit, is capable of paying her current mortgage and is current, many banks would not look at her situation. They are inundated with borrowers who have none of the above.
      To effectuate any of the options, your client will have to present a complete financial picture with 2 years tax returns, bank statements, pay stubs, the whole nine yards.
      Also, remember short sales finished this year incur no tax for debt forgiveness. A short pay, on the other hand, would be a “taxable event” for all the debt forgiven…in this case $110K or thereabouts..

  19. I live in South Florida condo for 5 years. I bought it in 2004 when I was able to pay mortgage working as RE assosiate and Mortgage broker. Right now I am legaly blind and on disability since 2008. I applyed for short sale. The lender, American Home Mortgage, has approved short sale and reduced my mortgage from 800K to 669K, but even under this reduction I can not sale my condo. I would like to stay in my home with the family and get settlement (short pay off from my lender),What would you recommend to do in my case?

    Regards,
    Robert: 305-319-9804

  20. A broker I’m working with is currently negotiating a short payoff with my lender (I plan to stay in the home). My biggest concern is that I don’t want it to affect my credit. Based on the info posted, a short payoff SHOULD not affect my credit. How can I ensure that it will not affect my credit? Lastly, I wasn’t advised that a promissory note on the difference would be owed. Am I missing something here?

    • Every situation is different, so I can’t comment on your particular one. If short payoff is proceeded by not paying the mortgage on time, then, of course it will affect your credit.
      It’s also normal for lenders to demand promissory notes usually at very low rates, minimal payment schedules for any number of years….In a short payoff, the borrower is asking
      the bank to just forget about a large portion of the balance owed while the borrower keeps the house. Obviously, banks don’t want to do that nor would any creditor. The idea
      is maybe in the future the borrower could pay the contracted amount.

      • My credit is good. I’ve paid my mortgage on time (never late). I wanted to refi to lower my interest rate to reduce my monthly mortgage payment. A mortgage broker proposed a short payoff. Not sure if this is the best route to take…

      • Sometimes this route is called a short refi. At this point, you can get a refi for today’s low rates if you can qualify [income, credit] and if the refi sought does not exceed 105%
        of value of your home. That would fall under Obama’s plan. But, as mentioned above, every case is different. Complications ensure if your home has lost too much value to
        fit the Obama parameter, if you have a second mortgage whose lender may or may not agree to this or a HELOC. It also depends on the state, whether it’s a primary residence
        and whether this is a purchase loan…

  21. wachovia keeps telling me next week next week etc before they will have a loan mod for me seeing that im never late are they just stringing me along my realiter tells me to stop making payments before they will help me is she right?

    • Not knowing all the details of your situation, of course, I cannot say for sure. Until last month when Obama’s plan came out, banks would not consider anyone who was not at least 30 and more likely 60 days late for a loan mod. Obama’s plan recognized that help earlier might produce better results, so it specifically states that borrowers may be current and still get a loan mod. Maybe in practice this still isn’t working out, If you do miss payments, you credit will take a huge blow..

  22. I was contacted about doing a short pay off. I had to do a modification on my home to not loose it and lowered my payment for 5 years and than it goes back to the original arm. Will I loose my home on a short pay off? I don’t want to sell my home or move. I just don’t trust the banks any more. Any information would be helpful.

  23. I am doing a short refill with Select Portfolio Servicing and First Franklin original purchase price of my house was $300.000, Loan with SPS is $240.000 and FF is $60.000. However SPS approve me to refill for $218.000 I am having a very difficult time with FF to approve me for the short refill. My question is what should I do? What step should I take? (Short refill allow you refinance your property at the current value)

    • Refinancing or having your second mortgage purchased at a discount both depend heavily on one element: the equity you have in the property.
      If you have a lot of equity, someone might buy it. If not, then not…

  24. Pingback: New Hope for Those in Trouble? | Mortgages Unzipped

  25. That’s interesting, Emily. I knew banks were modifying loans, sometimes drastically, usually slightly, but I had not been aware banks would refi at current market value. How much difference is there between your current market value and your mortgage? How much of that is the bank requiring that you pay?

  26. I Just read your article on a Short -pay-off….It seemed incorrect…We are involved in a short pay-off negotiation and it is to refinance our home at current market value and continue to live in our home…

  27. That depends on the bank, too. I am doing one now with Countrywide–6 weeks and we have verbal approval. I really wonder what will happen with IndyMac properties…

    • I’m doing two with IndyMac bank, So far, all we have gotten is a run around. Can’t get to the decision maker. Is anyone hear dealing with IndyMac bank? Please let me know how it is going.

    • So many complaints—the gov’t is supposed to be working on that, but the banks don’t seem very cooperative.
      Why do they need all that paperwork? If the sellers aren’t paying and they aren’t going to, why request tax
      returns, financial statements and so forth? Someone called me and said he had been in his house without paying
      his mortgage for 24 months and he was getting rent from a back house! Makes no sense..

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