Borrowers facing foreclosure may ask the lender to accept a discounted payoff on their loan, a “short sale” or “short payoff”. This allows borrowers to avoid foreclosure actions, and often offer lenders an expedited and less costly resolution of the situation.

Most lenders have specific criteria that relate to borrowers’ ability to repay the debt, in order to consider short sales. Some lenders will consider a short payoff only if the borrower can produce evidence of hardship. The lender determines if the seller is eligible to sell the home at less than the outstanding debt due to hardship. Owing more than the home or property is worth is not necessarily a hardship. Hardships include divorces, unexpected hospitalizations and medical expenses, job losses, deaths of family members or similar catastrophic situations. Additionally, a budget must show that the seller’s expenses exceed their income/assets, they are behind on their payments, and there is no way to repay the lender.

A property that is distressed or requires extensive repairs may also qualify. If the lender were to foreclose on this type of property, it would have to pay for all the repairs necessary to sell the property. A short sale may represent a more cost-effective way to pay off the loan.

Steps of the Short Sale from the buyers perspective.

1. Property listed and marketed for sale
2. A purchase agreement received and agreed to by both buyer & seller, subject to short sale approval from lender(s) holding the mortgage notes.
3. Preliminary title report ordered, estimated HUD-1 calculated and drawn up
4. The completed short sale package reviewed and sent to the lender(s)
5. The lender receives the package and reviews for completeness. Incomplete packages are usually disregarded.
6. The lender then orders the BPO &/or Appraisal, usually within 30 to 60 days
7. The lender reviews and compares the values of the BPO/Appraisals to the purchase offer amount and net proceeds to the lender.
8. If all is in line, the lender forwards the package to the underlining investor for final approval, which could take 30-90 days for final approval

Depending on the institution, there may be multiple stages and negotiators handling the file. If there are no hangups there could be decisions of acceptance, counter offers, or rejections, hopefully within 60 to 120 days.

Short sales are time consuming and difficult. See Why Short Sales Can Fail page. Finding the right buyer for a short sale is a difficult task by itself. The buyer must be in the position to wait, and have the patience to wait month on end without any substantial updates. Then the sale could be denied by the lender, and in the mean time the buyer may have missed other purchasing opportunities. Buyers will also need to have their financing in place and be able to close the sale, usually within 30 days of receiving the short sale approval. Short sale approvals are usually valid for 30 days, extensions could result in additional fees and expenses which could cancel out the short sale. Buyers and sellers may need to be prepared for additional out of pocket expenses to settle at close.