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As stated above, you own your home during the foreclosure case. You can sell it at any time before a foreclosure sale. This may be possible even if you owe more on your mortgage than the house is worth.
A "short payoff” occurs when your lender agrees to accept less than the total owed in exchange for a release of the mortgage as a lien on the property. Other terms for a short payoff include, "short sale", "pre-foreclosure sale", or "pre-sale".
According to HUD, short payoffs account for approximately 50% of all workouts on conventional loans. The Horizon Legal Center has considerable experience in negotiating and completing short payoffs. It is our experience that since this option is one of the oldest and most frequently used, it is the one that lenders are most familiar with. And since they are the most familiar with it, it is the option they prefer more than any other.
You must determine how much time you have to sell your home. Refer to the timeline in Chapter Five for this purpose. If a foreclosure sale is imminent, consider filing a Chapter 13 bankruptcy to stop the foreclosure until the house is sold.
If you decide to sell your home to avoid foreclosure, the way to handle it depends on whether or not you have equity in your home. You have equity in your home if there will be enough money to payoff your mortgage in full after all the expenses are paid when you sell. If not, then you must apply for a short-payoff.
- Homes With Equity:
lf you have equity in your home, you can sell it just as you would if you were not in foreclosure. The only difference is that you must order the loan payoff statement from the foreclosure attorney instead of getting it from your lender. Your only concern should be closing the sale and paying off the loan before the end of the redemption period.
- Homes With No Equity:
You must apply for a short-payoff if the sale
of your house will not leave enough money to payoff all the mortgages and other liens on your property. If this is the case, call your lender immediately and get a financial package from them to make your request for a short payoff. The sooner you do this, the sooner the lender can complete its review of your short payoff request. Different lenders have different packages for different workout options. Make sure that you request and receive the package to apply for a short-payoff
The longer you wait to get the package, complete it and return it to your lender, the longer it will take to get the short payoff approved. The longer it takes to get the short payoff approved, the greater the chance that the buyer for your house will get impatient and void the contract in order to buy another house.
The purpose of the financial package is basically: 1) to make sure that the reason for the default was unavoidable, involuntary or beyond your control, 2) to make sure that you have experienced financial hardship, 3) to make sure that you do not earn enough money now to pay the deficiency in installments over time, and 4) to make sure that you do not have money to pay some or all of the deficiency in a lump sum.
Important points to remember about selling your house if a short- payoff is required:
- Carefully choose the people who will represent you in the sale of your home. Many attorneys and realtors are not familiar with the short sale process. It is important to use a attorney and a realtor with experience in foreclosure and short sale procedures.
- The listing agreement that you sign with your realtor must provide:
"The seller's obligation to perform on this contract is subject to the approval of the
lienholders on the property. The Seller may cancel this agreement prior to the ending
date of the listing period without advance notice to the broker and without payment of
a commission or any other consideration, if the seller tenders a Deed-in-Lieu of
Foreclosure"
It is very important for you to write this language on the listing agreement. If you do not, you may be liable to pay a realtor commission even if you do not sell your house!
- The contract that you sign to sell the property absolutely must provide:
"This contract is contingent on acceptance by the seller's lien holders."
If your lender does not approve the contract, this language will allow you to back out of it. If the contract does not have this language and your lender does not approve a short-payoff you must either bring money to the closing to make up the shortage or your buyer can sue you for breach of contract!
- Each case is different. Your lender's decision to approve or deny the short-payoff will depend on many factors.
- FHA-Insured Mortgages
HUD has clear guidelines for reviewing short-payoff requests. As long as you meet the guidelines, your request will be approved. After your lender receives all of the written documentation from you.. they will have the house appraised. The basic guidelines for approval are:
- Your loan must be 2 months behind.
- You must live in the property.
- The reason for the default on the mortgage must be unavoidable, involuntary or beyond your control.
- The house must appraise for at least 70% of the unpaid principal balance.
- The contract price must be at least 95% of HUD’s appraised value.
- The net amount to your lender alter all closing expenses are paid must be at least 87% of HUD's appraised value.
- You may be entitled to a $1,000 pre-foreclosure sale incentive.
- VA Guaranteed Mortgages
Unlike HUD, the VA has no set guidelines for reviewing short payoff requests. Rather, they will conduct their own analysis to determine if they would lose less money by completing the foreclosure or allowing you to sell the house.
- Conventional Mortgages
There are also no guidelines for reviewing short payoff requests on conventional mortgages. Conventional loans usually have a investor such as Fannie Mae or Freddie Mac and private mortgage insurance. Your short payoff request must be approved by all the parties to your mortgage: your lender, the investor and the private mortgage insurer. This process takes time, so prepare the buyers to wait about 60 days from the contract date until closing.
Short payoff requests are an art form. Each one is different and the parties to the contract must bring the following qualities to the transaction: patience, persistence, knowledge, experience and creativity. Following are additional points about short payoffs:
- The more liens on the property, the more difficult it is to
complete the short payoff. We have experience with negotiating short payoffs with up to 3 liens so we know it can be done, it's just more difficult and time consuming.
- The realtors will be paid, but it is common to have the commission reduced to 5% of the purchase price.
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