What Is the Difference Between a Short Sale and a Short Payoff?

Learn the difference between a short sale and a short payoff.

By , Attorney

Short sales and short payoffs are similar in that both transactions involve the lender allowing your home to be sold for less than the total debt you owe. But they're not the same.

Short sales generally work if you are facing foreclosure or can't pay your mortgage and your property is "underwater" (you owe more than your home is worth). Short payoffs work best if you aren't having trouble with your mortgage payments.

How Do Short Sales Work?

In a short sale, the lender agrees to accept less than is owed on the mortgage and release the property's lien. Short sales are one way that homeowners can avoid foreclosure.

Eligibility for a Short Sale

Generally, to be eligible for a short sale:

  • the home's market value must have dropped significantly
  • the homeowner must be in default (late on payments) or likely to go into default soon
  • the homeowner has little or no assets that could be used to satisfy the debt, and
  • the homeowner must have experienced a financial hardship.

Short Sale Deficiencies

Because a short sale results in a sales price short of the entire debt amount, the difference between the total debt and the sale price is the "deficiency."

Sometimes the former homeowner agrees as part of a short sale to pay back some of the deficiency in a promissory note with a down payment or through a payment plan. Other times, the lender will agree to waive the deficiency as part of the short sale agreement. (If the lender forgives some or all of the deficiency, you might be liable to pay taxes on the canceled amount.)

If the agreement doesn't waive the lender's right to seek the deficiency, some states allow a lender to get a personal judgment against the borrower after the short sale to recover the deficiency amount.

How Do Short Payoffs Work?

A "short payoff" is when a lender agrees to accept less than the mortgage's full balance from the borrower as payment in full for the debt. With a short payoff, the borrower can remain in the property by paying off the house's current market value (or less) instead of more than it's worth.

You must come up with enough money to complete a short payoff. If your credit is damaged from not making mortgage payments or making late payments, you probably won't qualify for a new loan to do the payoff. Getting a lender to agree to a short refinance (when a new lender or your current lender provides a new home loan that's less than what you owe, and your current lender forgives the difference) isn't usually available.

So, typically, short payoff funds come from someone who isn't a borrower on the current mortgage loan.

Criteria for a Short Payoff

Generally, to be eligible for a short payoff:

  • the person doing the short payoff must demonstrate the ability to pay off the debt in a lump sum
  • the borrower will probably have to submit an application, similar to applying for a loan modification or short sale (but you probably won't have to provide proof of a hardship)
  • the lender will probably require that the borrower be current on mortgage payments, and
  • the person doing the short payoff must have a steady income and good credit.

Not all lenders will agree to a short payoff.

Pros of a Short Payoff

A short payoff lets borrowers rid themselves of the home loan with little damage to their credit score.

How Does a Short Payoff Affect Credit?

A short sale is usually listed in your credit reports as "not paid as agreed." This statement means that the lender received less than the full loan balance. This type of designation does much less damage to your credit than, for example, a foreclosure or bankruptcy.

Cons of a Short Payoff

The downsides to short payoffs are that not all lenders are open to the idea, and they can be difficult to negotiate. And, again, you might be liable to pay taxes on any forgiven amount.

Should I Do a Short Sale or a Short Payoff?

Ultimately, if you're behind in your mortgage payments (or soon will be) and are suffering from a financial hardship, then a short sale might be appropriate.

But if you're current on your mortgage payments, have financial resources, and want to move away from an underwater home, then a short payoff might be the right choice. Consider talking to a foreclosure lawyer to learn more about whether one of these options is appropriate in your circumstances.

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