By: Lance T. Denha, Esq.
We have all heard over the years given the decline in the housing market, that lenders were offering several loss mitigation options with two in particular involving the sale of a residence, being a Short Sale and a Short Payoff. Although property values have bounced back to a certain extent, there still remain significant areas where houses remain underwater.
Short sales and Short payoffs are very similar in that both transactions involve the lender allowing your home to be sold for less than the total debt you owe. However, there are some significant distinctions between these two transactions. Short sales generally work if you are facing foreclosure or can’t pay your mortgage whereas a Short payoff works best if you aren’t having trouble with your mortgage payment.
A Short Sale is where the lender or investor agrees to accept an amount less than is actually owed on the property. The primary reason why a lender or investor would agree to be “shorted” on the sale is to avoid going through the costs of foreclosure which include, attorney’s fees, court costs and ongoing property maintenance after foreclosure, to mention a few. A lender will sanction a short sale by letting a buyer purchase the home for less than the mortgage balance. There are many factors that will affect your ability to qualify for a loan in order to buy a house again after a short sale. If you’ve taken good care of your credit since, paid all your bills on time in the last year, have money saved for down payment (as little as 3% to as much as 20%), and of course, you have income to qualify after a short sale, then yes, it is possible to buy a house again in as little as 12 to 36 months after a short sale, subject to certain conditions. Typically the short sale wait time is 3 years after a short sale for FHA loans, 4 years after a short sale for Conventional Loan, 4 years after a short sale, and 2 years after a short sale for VA loans.
A Short Payoff is when the lender agrees to release the lien (their interest) on the property and allows the property to be “conveyed” to a new owner. The lender agrees to accept less than the amount owed on the property in order to release the lien, however they extend a certain amount of “credit” to the borrower in the form of an unsecured line of credit or promissory note.
The Criteria for a Short Payoff requires that that the mortgage is current, the borrower has great credit, and the borrower has and can demonstrate the ability to pay off the debt. You would request a short payoff when the home has lost value dramatically and the borrower / seller does not have the ability to pay the large amount to get completely out of the property.
How does a Short Payoff help the Borrower? For one, The Borrower is able to move out of the property and get on with their life. Also the Borrower should receive little (and sometimes no) negative feedback on their credit. Lastly, in most cases the Borrower receives a lower interest rate on the new loan. A short payoff can be a good option when:
- the market value of the home has dropped significantly
- the homeowner can afford to make mortgage payments
- the homeowner wants to move away from the property, and
- the homeowner does not have the ability to pay a large amount of money to cover the deficiency between the sales price and the total debt.
A short payoff allows borrowers to rid themselves of the home with little or no damage to their credit score, thus allowing them to make a subsequent home purchase immediately afterwards. The downside to short payoffs is that not all lenders are open to the idea and they can be difficult to negotiate.
Ultimately, if you are behind in your mortgage payments (or soon will be) and are suffering from a financial hardship, then a short sale is probably the best route to pursue. However, if you are current on your mortgage payments and simply want to move away from an underwater home, then a short payoff might be the right choice for you.