Short Sale

What is necessary to persuade a bank to accept a short payoff on a mortgage?

You have to persuade the bank that this is the best possible deal they are going to get. You can't make the payments, and if they foreclose they will get less money.

A short sale or short payoff is defined as a sale where the proceeds from the sale will not cover the secured obligations of the owner. The cash they will receive from the sale is "short" of the necessary amount. The house is no longer worth what they paid for it.

First off, you need to draw a coherent picture of the loan payment being unaffordable. If you were on a negative amortization approaching recast, or hybrid ARM(usually interest only for the fixed period) that is now ready to adjust, you're facing a much higher payments. Even if you were able to afford the minimum payment before, now you can't and you've decided to sell for what you can get before it bankrupts you to no good purpose. You're going to have to prove you can't afford it, of course, the bank isn't just going to accept your word, but several late payments or a rolling sixty day late that looks headed for ninety have been known to be persuasive. Nonetheless, there are a lot of tacks that you don't want to take. Remember, lenders want to be repaid and they've got a couple of pretty powerful sticks to shake at you. They are not going to agree to sacrifice money merely because to make the payments would be uncomfortable for you.
You're going to have to persuade them it's impossible.

Second, you're going to have to persuade the lender that this is the best possible price that you are going to get, and that anything more they might get from foreclosure is going to be more than offset by what they'll lose through the expenses involved. Not to mention that they might end up owning the property, which they don't want to do because then they have to spend more money selling it.

Fourth, just be prepared for the fact that the lender is not only not going to approve the transaction if you get any money, but that they're also going to send you a form 1099 after it is all done. This form 1099 will report income for you from forgiveness of debt. This is taxable income! Many agents eager to make a sale will not tell the sellers this, and when you get right down to it, there is no legal requirement to do so, but I've always thought this was one of the ways to tell a good agent from a not-so-good one.

For the buyer, short sales are attractive for any number of reasons. Typically the seller is in a situation where they have to sell, and everyone knows it. The option of waiting for a better offer really isn't on the table if what you're offering is anything like reasonable. They can't bluff you, they should know that bluffing you is a waste of effort, and somebody should have explained to them that they really just want out now -and why this is so-before it gets worse. What's not to like?

In summation, short sales are a way to cut your losses for sellers, and a way to get a wonderful price for buyers, but you have to know how to convince the lenders to accept them, and how not to overplay your bargaining position, lest you get left out in the cold.