A short pay occurs when the market value of a property is not enough to cover the mortgage or loan secured against that same property. In essence, the bank or lending institution will be forced to accept a payment that is significantly lower than the total amount owed by the property owner. For this reason, this type of financial transaction is also referred to as a discounted payoff.

How This Payment Plan Works

For many homeowners, short pay offers a better alternative than going through foreclosure. When you opt to use this method to pay off your loan or mortgage, you will be forced to sell your property at a reduced price. The proceeds of the sale would then be given to the bank or lending institution as payment for your obligations. It is important to note that most banks would rather accept cash payment, even if it is lower than the loan balance, rather than be left with another foreclosed property in their books.

When considering this loan payment option, you can approach mortgage specialists in your area and have one act as your short pay facilitator. Your facilitator will process all the paperwork necessary for the sale of your property. For lenders to accept this payment scheme, homeowners will typically be required to submit a hardship letter describing why they can no longer pay the monthly mortgage. In most cases, you will also be asked to sign an authorization document to speed things up for your facilitator. For this reason, it is vital that you choose a reputable mortgage specialist. Moreover, make it a point to read and review all the paperwork before you sign it.

The most difficult part in this type of payment plan involves convincing your bank or lending institution to accept an amount that is lower than the loan balance. This type of debt payment results in big losses for banks. However, as mentioned, financial institutions are better off accepting short pays than enduring foreclosure proceedings and costs, especially during a bad housing market.

How Short Pay Benefits Homeowners

When you choose this method of paying off your loans or mortgage, you can enjoy the following advantages:

  • You avoid the embarrassment of having your property foreclosed.
  • Your credit rating will not suffer severely because most banks consider short pay as full payment for loans.
  • You no longer have to worry about where to find money to pay for your loans.

Bad Consequences of This Payment Plan

Here are two unfavorable consequences that you may face after undergoing a short pay:

  • The difference between the actual loan balance and the reduced payment may represent debt forgiveness and is likely to be considered by the Internal Revenue Service (IRS) as taxable income, but the new Mortgage Forgiveness Debt Relief Act of 2007 can allow borrowers to work around IRS rules.
  • Your credit rating may be still lowered but not to an extent that you would otherwise suffer in a foreclosure.


You should consider a short pay only when you are in desperate circumstances. This type of payment plan is only better than foreclosure. To protect your credit score, it is always best to speak with your bank or lending institution and find a payment scheme with which both you and your lender will be happy.

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