What is a short pay?
A short pay is when an owner pays off a loan by paying less than what is currently owed on it. A short sale is the sale of a property such that it results in a loan being short paid by the owner. Both occur when the property is sold and the market value is less than the loan currently owed by the owner.
Until recently, few people knew much about short sales or short pays. Those real estate agents and attorneys who were active in real estate in the 1990s are revisiting the now- little-known practice of short selling property as an alternative to foreclosure. A short sale is also sometimes called a “pre-foreclosure sale.” However, not everyone facing a foreclosure qualifies for a short sale.
When should a home owner consider a short pay?
For a home owner whose property’s market value is less than the total encumbrances they owe, and who is having increasing difficulty making the mortgage payment, a short sale may be a good alternative to foreclosure. Know your options as a seller and you may not be forced to let the property go into foreclosure.
If you don’t qualify for a short pay, you may still be able to negotiate what is termed a work-out with your lender, whereby you agree to pay the balance of the debt upon the close of escrow. As a result of paying off the balance of the loan, you would likely have no negative credit reprecussions or other legal issues.
Contacting a real estate agent or attorney knowledgeable in the negotiation of short sales will start the process and help you figure out whether or not a short pay, with or without a work-out with your lender, is an option for you.
Who should consider a short pay?
Although a short sale may be the best solution for some homeowners, it is not for those individuals who have some assets, a good job with garnishable wages, etc. This is why individuals considering a short pay-off should seek advice regarding the advisability of proceeding in this manner.
How does one successfully complete a short pay?
In order to successfully negotiate a short pay, without a work-out on the balance of the loan amount, you will have to demonstrate that the probability of a foreclosure in your case is high. If it is, then the bank will consider you a candidate for a short pay. The package you submit to the lender will consist of all the supporting documentation illustrating your situation and your need for short pay approval. It is not enough to write a hardship letter alone, as most lenders will require proof of the reasons why they should approve your file. The lender will consider the following: illness of the borrower(s) when accompanied by doctor’s statements, death of a borrower(s), divorce or legal separation when accompanied by legal documentation from the court or your attorney, involuntary job loss with documentation and past check stubs, etc. In addition to the above reason(s) and supporting documentation you will provide the lender, they will also require complete financial disclosure of income and assets.
Most lenders will require that the entire package of information be submitted at one time. It is important to the lender that the file they establish on your case not be completed in pieces or sections. The main reason is that the loss mitigation department people, who are those that help us negotiate short pays, may have up to 200 files each at one time to process. As a result, they have no time to track down paperwork or people. If the file is complete, it gets moved to the top of their stack and pushed successfully toward approval.
This would be the time to put your property on the market. In order for you to accomplish your goal of short paying the loan, and especially if you are already in default on the loan, the property must be aggressively priced and marketed. It should be priced below what the comparables would suggest, and not at market value. When the first notice of default has been filed by the lender there is a clock that begins ticking and you will have a limited time to accomplish the result you want.
It is your agent’s responsibility from that point on to follow up with the person to whom the package was submitted. The package may move from person to person before it is in the hands of the negotiator who will do a final review and approve the short sale.
What about the tax implications of a short pay?
There may be tax ramifications as a result of a short sale that vary from those of a foreclosure. Therefore, before you decide to go with a short pay, you may want to consult with your tax advisor about any tax liability.