Real Estate Law
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1. Mortgage company mentioned that .. in no event shall you receive any funds from the Short Payoff ... . This sounds like they are receiving my Lump Sum but with a condition to sale the property ?
That is exactly correct. A "short payoff" is when the lender agrees to release the lien (their interest) on the property and allows the property to be “conveyed” to a new owner. The lender agrees to accept less than the amount owed on the property to release the lien however they extend a certain amount of “credit” to the borrower in the form of an unsecured line of credit or promissory note if the debt is not paid off in a lump sum.
2. Can I keep the property with a Short Payoff ?
No, the entire premise is that you are selling it and need to get a clear title for the buyer. When a lender writes off a debt, they aren't forgiving it. That is a common misconception. This is just a tax move that allows them to recognize the debt as a loss on their taxes. If they later recover on the debt, they have to count it as income.
If you want to keep the property, then you have to just offer them a straight settlement amount to settle the debt and get them to release the mortgage lien. If they have written off the debt, then it is probably pretty unlikely that they would foreclose on the debt unless the property is worth substantially more than the first mortgage, but it is a possibility.