Short Pay Off

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What is a short pay off? F&Q's
A short pay off is where your lender will forgive a portion or all of the short amount. Example: Your home is worth $200,000, but you owe $220,000 on it. If you were to sell it at $200,000, you might net $184,000, or $36,000 less than what you need to pay off the loan.

Why would a lender write off that much of money?
Just about all of them will, with justification. If you have justification about your loan most lender will write it off. Justification means a substantial loss of income that would prevent you from paying on the mortgage, therefore being forced in a position to sell the home. Lack of cash reserves will also serve as justification.

Beware, depending on how you negotiate the transaction, it could go on your credit report as, "settled," or, "paid," or "short payoff." It depends on the lender and how well you can negotiate.

Are some lenders harder to deal with than others?
Yes. If you have a Freddie Mac loan, Freddie Mac will probably want you to contribute to the short sale, get your agent to reduce brokerage fees, and get the buyer to take the property with the termites. Some lenders will just ignore you.

What will my lender require from me in order to consider participating in a short sale?
Packaging is very important. When you place the property on the market (go with an agent), your agent should send the lender the following:

  1. Your past 2 years tax returns
  2. Letter of hardship
  3. Complete loan application
  4. Preliminary title report
  5. Listing contract
  6. Copy of MLS
  7. A marketing plan for your home
  8. A broker price opinion (like an appraisal).

If you have an offer, all of the above should be enclosed with the offer (except for the marketing plan) plus the purchase agreement, and a good faith estimate as to what the lender will net after the close of escrow.

Why should I list with an agent?
If you're loan is current, you may be able to get a qualified buyer yourself. If your loan is delinquent, or in default, you don't have time to play around getting your home sold. You need as much exposure as possible.

What happens if my lender say's "No," and I'm in foreclosure?
This is one situation where "No," means, "Maybe, you just haven't convinced me that participating in a short sale is to my benefit." Keep hammering your lender, and do not take your home off the market until your lender agrees to a sales price and the prospective buyer has formal loan approval.

Can any real estate agent or attorney handle a short sale?
Many will say they can. There's no real way to tell if they can. If your home goes into foreclosure, you'll get flooded with a ton of mail. There's a good bet that most of the mail is from people who have helped out previously in these situations.

How can I assure a non-purchase money lender won't go after me after the short sale?      
When any lender agrees to a short pay, they are relinquishing their right to pursue the borrower in the future.

Are there any tax ramifications?
Yes. According to IRS Section 108 a-e, there are debt/income interpretations that may come into play. The IRS may view the deficiency on a non-purchase money loan as income and demand you to pay taxes on that amount.