Understanding Short Sales

Borrowers who are facing foreclosure may ask the lender to accept a discounted payoff on their loan. This is called a "short sale" or "short payoff." It allows the borrower to avoid a foreclosure action, and may offer the lender an expedited and less costly resolution of the situation.

Historical trends tell us that the number of short sales has increased when changing markets soften home prices and leave homeowners with a higher mortgage interest rate or loan balance. For the consumer, negotiating a short sale with the lender may seem a daunting task, particularly at a stressful time when foreclosure looms. A short sale allows the borrower to maintain a better overall credit record than with a foreclosure. It also allows times for the homeowner to relocate on a more convenient timetable instead of facing eviction and possibly a deficiency judgment down the road. A short sale may impact the borrower's tax situation, so a tax advisor should be consulted.

Most lenders have specific criteria to consider a short sale that relate to the borrower's ability to repay the debt. Some lenders will consider a short sale only if the borrower can produce evidence of hardship. A property that is distressed or requires extensive repairs may also qualify. If the lender were to foreclose on this type of property, it would have to pay for all the repairs necessary to sell the property, it would have to pay for all the repairs necessary to sell the property. A short sale may represent a more cost-effective way to pay off the loan.

For agents, assisting a homeowner with a short sale means not only a commission but the satisfaction that comes from helping someone out of a tough spot. The benefit to the borrower is that the agent can help negotiate with the lender and field offers from potential buyers as well as collect the documentation that goes with such a sale.

The tips on the following pages review many of the aspects of a short sale, but consumers are urged to consult their attorney, HUD homeowner counseling center, tax professional, and other appropriate professional agencies for assistance.