Short Sales

A "short payoff" occurs when your lender agrees to accept less than the total owed in exchange for a release of the mortgages as a lien on the property. Other terms for a short payoff include short sale, pre-foreclosure sale, or presale.

You own your home during the foreclosure case. You can sell it at any time before a foreclosure sale. This may be possible even if you owe more on your mortgage than the house is worth.

According to HUD, short payoffs account for approximately 50% of all workouts on conventional loans. This option is one of the oldest and most frequently used, and it is the one that lenders are most familiar with. Since they are the most familiar with it, it is the option they prefer more than any other.

You must determine how much time you have to sell your house. Refer to a Foreclosure Process timeline. If you decide to sell your home to avoid foreclosure, the way to handle it depends on whether or not you have equity in your house. You have equity in your house if there will be enough money to pay off your mortgage in full after all the expenses are paid when you sell. If not, then you could apply for a short payoff.

Homes with no Equity:

You apply for a short payoff if the sale of your house will not leave enough money to pay off all the mortgages and other liens on your property. If this is the case, call your lender immediately and get a financial package from them to make your request for a short payoff. The sooner you do this, the sooner the lender can complete its review of your short payoff request. Different lenders have different packages for different workout options. Make sure that you request and receive the package to apply for a short payoff.

The longer you wait to get the package, complete it and return it to your lender, the longer it will take to get the short payoff approved. The longer it takes to get the short payoff approved, the greater the chance that the buyer for your house will get impatient and void the contract in order to buy another house.

The basic purpose of the financial package is: 1) To make sure that the reason for the default was unavoidable, involuntary or beyond your control. 2) To make sure that you have experienced financial hardship. 3) To make sure that you do not earn enough money now to pay the deficiency in installments over time, and 4) To make sure that you do not have money to pay some or all of the deficiency in a lump sum.

FHA-Insured and VA Guaranteed Mortgages:

HUD has clear guidelines for reviewing short payoff requests. After your lender receives all of the written documentation from you, they will have the house appraised. The basic guidelines for approval are:

-Your loan must be 2 months behind.
-You must live in the property.
-The reason for the default on the mortgage must be unavoidable, involuntary or beyond your control.
-The house must appraise for at least 70% of the unpaid principal balance.
-The contract price must be at least 95% of HUD's appraised value.
-The net amount to your lender after all closing expenses are paid must be at least 87% of HUD's appraised value.

Unlike HUD, the VA has no set guidelines for reviewing short payoff requests. Rather, they conduct their own analysis to determine if they would lose less money by completing the foreclosure or allowing you to sell the house.

Conventional Mortgages:

There are no guidelines available for reviewing short payoff requests on conventional mortgages. Conventional loans usually have an investor such as Fannie Mae or Freddie Mac and private mortgage insurance. All the parties to your mortgage; your lender, the investor and the private mortgage insurer must approve your short payoff request. This process takes time, so prepare the buyers to wait about 60 days from the contract date until closing.

Short payoff requests are an art form. Each one is different and the parties to the contract must bring the following qualities to the transaction: patience, persistence, knowledge, experience and creativity.

The more liens on the property, the more difficult it is to complete the short payoff.

Important points to Remember if a short payoff is required:

Carefully choose the people who will represent you in the sale of your home. It is important to use an attorney and a Realtor with experience in foreclosure and short sale procedures.

The listing agreement that you sign with your Realtor must provide: "The Seller's obligation to perform on this contract is subject to the approval of the lien holders on the property. The Seller may cancel this agreement prior to the ending date of the listing period without advance notice to the broker and without payment of a commission or any other consideration, if the Seller tenders a Deed-in-Lieu of Foreclosure."

It is very important for you to write this language on the listing agreement. If you do not, you may be liable to pay a Realtor commission even if you do not sell your house! The contract that you sign to sell the property absolutely must provide: "This contract is contingent upon acceptance by the Seller's lien holders."

If your lender does not approve the contract, this language will allow you to back out. If the contract does not have this language and your lender does not approve a short payoff you may have to bring money to the closing to make up the shortages.

Frequently Asked Questions:

What is a short pay off...?

"...Imagine your home is worth $200,000, but you owe $220,000 on it." If you were to sell it in the open market at $200,000, you might net $184,000, or $36,000 less than what you need to pay off the loan. A short pay off is where your lender will forgive a portion or the entire short amount.

What lender would just write off that type of money...?

"...Just about all of them will, with justification." Justification might mean a substantial loss of income that would prevent you from paying on the mortgage, therefore being forced in a position to sell the home. In addition, lack of cash reserves will also serve as justification. Attempting to sell short so you can upgrade to a larger property is not justification. Don't expect to place your home on the market at 75% of market value and expect your lender to jump on any offers.

How will this affect my credit...?

"...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: Your past 2 years tax returns, Letter of hardship, Complete loan application, Preliminary title report, Listing contract, Copy of MLS, A marketing plan for your home, A broker price opinion (like an appraisal). When 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.

What happens if my lender says "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...?

"...A lot 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. One way to tell is if the person you're dealing with will ask you for the information outlined above. They'll know these are the requirements.

If the loan is secured by the property, can the bank go after my assets to make me pay the remaining balance of the loan...?

"...The bank will try and guilt you into doing so, ignore them. If they refuse, threaten to foreclose and be ready for the bank to do so. At that point, they will usually negotiate." Once you refinance the property, take out an equity line of credit, or obtain a consumer loan that is secured by the property, this rule no longer applies. The lender has the right to go after you in a deficiency judgment, even if a senior lien holder takes the property back and a junior loses his security instrument.

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 the amount. If the short pay transaction resulted in a net loss of $20,000 to the lender, your tax liability could be around $6,350.

So why would I want to do a short sale only to owe the IRS money...?

"...In order to limit your tax liablity." In some cases (not Citicorp, Fannie Mae, or Freddie Mac) the senior lien holder will allow for some funds to be allocated to the juniors. If you allow the property to go into foreclosure, and the juniors lose 100% of their money, you can get taxed on the full amount. You should really contact a CPA concerning this part of the Tax Code.

I have an FHA loan. They won't do a short pay. Any suggestions...?

"...Any feedback from other states would be appreciated." There are certain regions where FHA will not participate in short sales. One region is the state of California. If you are in foreclosure on an FHA loan in California, you may want to approach HUD to see if they will consider a lower interest rate, or some type of repayment schedule until you get back on your feet.

The information to be considered herein was gathered from sources deemed reliable, however McMillin Escrow does not guarantee information nor shall McMillin Escrow be held accountable or liable for any misinformation provided herein.