There is often confusion about what is a short sale and a short pay with a lender in foreclosure. A short sale is where the lender is willing to discount the existing mortgage(s) and sell to an investor for a "cash" transaction or an end buyer who does financing. Rarely the lender will finance a buyer if he has excellent credit and qualifies for another loan, and the lender believes the buyer will be living in the property. The only reason this wouldn't happen is because of the lender's internal policies or additional existing liens on the property.

A strict policy of lenders is that the homeowner may not receive any proceeds from the sale of the property if the lender agrees to the short sale. However, a short pay is when the lender discounts the mortgage just like a short sale, except they are willing to sell the property back to the homeowner. The motive for this "change-of-heart" with regard to the homeowner is purely economical. The lender believes it is in their best interest to get rid of the property and they will be receiving the same amount in the final analysis.

Let's look at a situation where the lender might sell the home back to the current owner. If there are liens (IRS or tax liens) or judgments that will not be extinguished at the foreclosure auction the lender will have to assume these liens to sell the property. But by selling the mortgage to the homeowner, the homeowner has the problem with extinguishing these liens and the lender will net more money even with taking a discount on the mortgage.

One thing that immediately comes to mind is "Where will the homeowner get the money to buy the mortgage?" The lender doesn't care and the homeowner needs to start finding an investor, private lender, or relative who has the money to buy the mortgage or who can get financing to get the mortgage purchased from the lender. Remember the new mortgage is going to be at 80% or less of the old amount which is "instant equity" to the homeowner since he is still on the deed. If someone else puts up the money for the purchase of the mortgage, isn't this just a short sale in sheep's clothing? No, because the lender is allowing the homeowner to retain title to the property unlike what happens in a typical short sale where the homeowner loses title immediately at the time of closing.

The huge advantage of a short pay is the homeowner retains title and possession of the property which is the wish of 85%+ of homeowners in foreclosure. The downside is the challenge of raising the money necessary to purchase the mortgage. The homeowner is potentially in competition with an investor who he may not know, but who is also looking to get his property and offers the lender more money to buy the mortgage. If there is any way the homeowner can raise the money to buy the mortgage, he should do it only after asking the lender if he will do a short sale and then approach a trusted comrade to buy the mortgage until the homeowner can get refinanced in a couple of years.