There are traditionally three loan mitigation options to foreclosure. These are:
- Loan modification, where the borrower gets to keep the property
- Selling the property in a short sale
- Giving the property back to the bank with a deed in lieu of foreclosure
Homeowners that want to continue to reside in the property often do not qualify for a loan modification because their income is insufficient or the mortgage bank prefers to foreclose. Many homeowners attempt to sell the property in a short sale to a friend or straw buyer. This is a form of bank fraud and allows the homeowner to get a discount on the property. All of the expenses for a closing, such as real estate broker fee, legal fee, title fee and insurance must be paid. But there is a more appealing and legal alternative called the short payoff.
A short payoff is simply that the bank will be discounting the payoff for the borrower to pay off. There is no fictional sale to a third party in a short sale or any type of bank fraud involved. You save all the expenses to market, sell and close on the property. And it can be negotiated. The bank will normally perform a comparative market analysis, which is a mini-appraisal. But the appraiser does not come into the house and often can only guess a broad range.
The bank will usually take into consideration that they will receive must less at a foreclosure auction. For one, persons bidding at auctions are not paying top dollar or even fair market value for the property. They have to evict the homeowner, who often causes damage. And pay carrying charges until the homeowner moves and the property can be sold. A bank also loses every month they do not receive interest on their money, and they have to expend money for taxes, insurance, and property maintenance.
Most property in foreclosure becomes upside down quickly (where the amount owed is higher than the property value). A short payoff will allow the homeowner to acquire the property for closer to its fair market value.
It may be difficult for a homeowner to borrow enough money to pay off the property, especially when their credit is negatively affected by the foreclosure. Perhaps the homeowner has someone, such as a friend or family member, that is willing to either borrow the money on their own. Another option is to add that friend or family member to the deed and refinance. The refinance monies pay off the short payoff and you have the property for a discounted amount and with an up to date and performing loan.