When Your Debt Exceeds Your Home Value
One option to consider is called a short pay off.
- 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 all of the
- 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.
Attempting to sell short so you can upgrade to a larger
property is not justification. In addition, lack of cash
reserves will also serve as 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.
- Why should I list with an agent? It seems if I can
save the brokerage fee that the lender would net more and
be more inclined to accept any offers that come in.
You are correct. 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
- 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.
- Should I try to hide any assets in order for the
lender to consider participating?
Most assets are traceable, except for personal
collections (guns, coins, etc.). If you own another
property, it will show up on your credit report. Your
lender may back track to your original loan application
to see if there are any other assets. No, don't hide
assets. If your lender discovers you're not dealing
honestly, they'll never co-operate.
- Can any real estate agent or attorney handle a short
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.
- 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
- 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. If
the short pay transaction resulted in a net loss of
$20,000 to the lender, your tax liability could be around
- So why would I want to do a short sale only to owe the
To limit your tax liability. 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
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.