Short Payoff vs. Short Sale or Foreclosure
65
What is a Short Payoff?
A short payoff on an existing home loan differs from foreclosure and short sales in one primary way: the homeowner keeps their credit. The downside is the homeowner also keeps all the debt. In a foreclosure, the homeowner walks away but will likely have to rent for quite some time until their credit can recover. In a short sale, a FICO credit score typically drops 300 points, but the homeowner is free of the entire mortgage amount. In a short payoff, the homeowner agrees to pay back the bank for the difference between the sale price and the mortgage principle. The bank keeps the potential of getting all of their money back. The homeowner keeps their credit score and can go buy a cheaper home.
When a Short Payoff is a Good Idea
A short payoff on an existing loan is usually a good idea when:
1. You have great credit
2. You have to move
3. You cannot refinance for an amount that makes sense
4. You have income and the ability to pay off the difference
5. The home value is slightly below mortgage value
A short payoff is a bad idea if there are other credit friendly options. These might include a refinancing mortgage combined with renting the home. It might also include commuting to the new place of work if that is the reason for selling. Calculate the costs of travel versus the cost of a short payoff.
Steps Toward a Short Payoff of an Existing Loan
1. Double check your credit reports to make sure there are no mistakes lowering your credit score.
2. Talk to your original mortgage provider to see if a short payoff is even an option for you.
3. Speak with a financial advisor and calculate the cost/benefits of a short payoff versus some other options (such as refinancing or renting).
4. Market your home at the short payoff price.
5. Sell your home, and payoff the difference over time.
See other related articles on this page for more information on short payoffs, short sales, foreclosures, and refinancing mortgages
