The Market is improving. Should you do a Short Sale or a Short Payoff?
Both a short sale and short payoff require the lender to allow your home to be sold for less than what is due on the loan. Short sales, however, are for those who can’t afford the home and the payments. Short payoffs are for those who can afford the loan but want to move out of a particular home for one reason or another. Below I will give more detail on the difference between the two key components in the Real Estate Industry.
A short sale involves the lender (Mortgage Company) allowing the sale of a home for less than what is due on the mortgage. The lender would agree to release the lien on the mortgage thereby releasing the borrower from the debt.
A short sale is normally only approved by the lender when the borrower is in a home where the property value is worth substantially less than what is due on the mortgage, the borrower is in default, the borrower cannot pay the debt, and a financial hardship exists justifying the short sale.
The sale results in the lender getting less than what is due on the loan from the sale. The difference between the amount of the sale proceeds paid to the lender and what remains due on the loan is called the “deficiency”. In a short sale, the lender will often waive the deficiency thereby letting the borrower off the hook for the remainder of the amount due. You must ensure that you get a release of the deficiency upon approval of the short sale to be released. If you don’t you still may have to pay the deficiency.
A short sale will affect the borrower’s credit. In addition, if a release of the deficiency occurs, the borrower may have to pay taxes on the phantom income that result from a release of the deficiency.
A short payoff will become more common as the housing market improves. When property values increase, the amounts due on deficiencies will shrink making a short payoff more appealing.
A short payoff, unlike a short sale, doesn’t affect the credit of the borrower. In this circumstance the borrower is not in default and the borrower has the ability to pay the loan. Instead, a short payoff lets the borrower move from a home with the promise to continue to pay the debt due, hence the deficiency. Thus, upon the sale, the borrower will pay the full amount of the deficiency at the closing or the borrower may be permitted to make payments on the deficiency with a new note. Another possibility is that the borrower will finance the payoff with another loan. This entire process will not affect the borrower’s credit. A short payoff merely lets the borrower move to another home while getting rid of the bad investment. In an increasing market, this move may make sense where a new job opportunity or better real estate investment exists.
To do a short payoff the borrower must be in a good financial position to pay the debt, the borrower will normally have to be current on all mortgage payments and the borrower must have a steady income.
When should you choose “None of the Above”
Often people feel that their home will never increase to a value that will exceed the loan amount. This can often be the case. However, if you don’t need to move, you can afford the payment and you are seeing a gradual increase in your property value (i.e. check out www.zillow.com as an example). You may just want to stay put. Once the value of the home exceeds what you owe, the extra money is yours. In addition, you are paying down your loan each month. This is reducing the amount you owe as well. If you can afford make extra payments on your loan over time, the gradual increase in the value of the home and the continuing payment of principal will reduce the spread between your loan amount and the value of the home. Before you know it, you will be able to sell your home and have a little money to show for it.
No matter what you chose, it may be advisable to consult an attorney for advice on which route is best for your situation. We can help analyze your particular situation and determine the best route to take.
By Attorney Ted Hamilton