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

"Short sales" and "short payoffs" are similar in that both transactions involve the lender accepting less money than you owe on your mortgage loan. But they're not the same. With a short sale, you give up your home. After a short payoff, you can stay in the property.

Short sales and short payoffs can work if your property is "underwater" (you owe more than your home is worth).

How Do Short Sales Work?

In a short sale, the lender agrees to let you sell the property to a new owner for less than you owe on the mortgage loan. Short sales are one way that homeowners can avoid foreclosure.

Example. A mortgage borrower who owes $300,000 on their house finds a buyer for the property at a price of $250,000. The lender agrees to accept $250,000 to release the mortgage lien, even though this amount is "short" of the total amount owed. This transaction is a short sale.

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

The difference between the total mortgage debt and the sale price is the "deficiency."

Example. In our example above, the lender agreed to let the homeowner sell the property for $250,000, but the total debt was $300,000. The difference of $50,000 is the deficiency.

Sometimes, 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.

In other cases, the former homeowner agrees as part of a short sale to pay some of the deficiency in a lump sum or by signing a promissory note and making payments.

How Do Short Payoffs Work?

A "short payoff" is when a lender agrees to accept less than the mortgage's full balance as payment in full for the debt. You must pay the agreed-upon amount in a single, lump-sum payment, not through a payment plan. Unlike a short sale, a short payoff allows you to keep your home. You, a family member, or a friend can do the short payoff. Or, you might be able to get a hard money loan or other alternative financing.

Example. JoJo owes $750,000 on her mortgage. Her home is valued at $700,000. JoJo's lender agrees to take less than is owed in a short payoff of $700,000. JoJo decides to stay in the property after completing the short payoff of $700,000.

A short payoff can be a valuable option for a homeowner who is underwater on their mortgage but has the means to pay a reduced lump sum to keep their property and resolve their mortgage debt.

Criteria for a Short Payoff

Generally, to be eligible for a short payoff:

• you'll have to prove you have the ability to pay off the debt in a lump sum
• you'll probably have to submit an application, similar to applying for a loan modification or short sale
• you'll have show that the home's fair market value has decreased significantly, and
• the lender might require you to be current on mortgage payments.

Not all lenders will agree to a short payoff. Again, usually, the homeowner must be underwater on their mortgage. A short payoff might also be possible if, for example, the property is in poor condition (such as it has damage or foundation issues, contains asbestos or lead paint, or has some other valid basis for a discount). Short payoffs are also sometimes possible in situations where the lender would have a problem with foreclosing, such as it wouldn't be able to prove it has standing to foreclose. In that scenario or another similar one, they might be willing to take less than what's owed on the mortgage because they'll potentially have difficulty if they have to foreclose.

Pros of a Short Payoff

With a short payoff, you get to keep the property (at a discounted price). You can use a short payoff to avoid a foreclosure and deficiency judgment.

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, 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 have the resources available, want to keep your home, and the circumstances are right, 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.