How to do a short sale in Massachusetts – Massachusetts Short Sale

How to Do a Short Sale in Massachusetts

One thing I’m constantly asked by homeowners is how can they short sale their property?  I wish this was an easy question to answer, but there are many variables that affect a homeowner who is underwater with their mortgage.

First, what Massachusetts and New Hampshire homeowners should know is that those states are recourse states.  What this means is the lender CAN pursue a homeowner for any deficient amount.  The deficient amount is the amount that the homeowner owes minus what the lender sells the house for at auction or short sale purchase amount.  The lender will also add on their fees and any other payments owed.

The second thing they should be aware of is a short sale is NOT like a traditional sale.  It can take anywhere from 2 – 12+ months to fully complete the process.  Every short sale in Massachusetts and New Hampshire is unique and there are no cookie cutter outcomes.

If a homeowner has exhausted all other options, including cutting back spending, budgeting, loan modifications, refinancing, and realized they still cannot afford their home, the likely option if the home wants to avoid foreclosure is a short sale.  They should contact their lender to explore if their lender will accept a short payoff of the mortgage and what the requirements are for the mortgage. 

If you lender is open to accepting a short payoff, the next step is to find a buyer.  There are several ways you can do this.  The fastest way is to search out an investor that has experience in purchasing short sales.  They will likely be your quickest route to getting your property under contract.  Another option is to do a For Sale By Owner advertisement.  Start marketing your property for sale and see if you can get it under contract.  An agent or Realtor experienced in short sales is another great avenue to try to get the property under contract.  You will want to interview the agent and ask them how many short sales they have assisted in, how fast they can get your property under contract and what their role is in the sale. 

I’m going to shock some homeowners right now, but I can tell you from experience the listing price and the purchase price DO NOT MATTER in a short sale.  What matters most is that upon approval the lender releases the lien and agrees NOT TO PURSUE the deficient amount.

The next step is to start the paper trail

Most lenders want a short sale packet that includes:

 1)    A purchase contract

2)    The homeowner’s hardship – So many homeowners over think this one, but the lender wants to know why the homeowner could once afford when they took out the mortgage and now find the mortgage difficult to pay.  That is the essence of a hardship letter explanation

3)    2 copies of recent pay stubs, disability checks, or unemployment checks.  If you are self employed the lender will likely request a profit and loss statement

4)    A copy of your last two month’s worth of bank statements

5)    Your financial statement.  This form can be provided by your lender, an investor, or real estate agent.  It will outline your income vs. your expenses.

6)    Copies of your two last completed tax returns or a 4506-T form

7)    A listing agreement if the property is listed.  You can try to do a For Sale By Owner, and the lender will likely want a copy of whatever advertisements you placed.

8)    Authorization for release – This form shows the lender who is allowed to speak to the lender regarding your short sale.

9)    A HUD-1 form – Which should be provided by the closing company, agent, or investor

The above represents what most lenders look for in a short sale packet, however some lenders may require more information or they may require information filled out specifically on their forms.

I caution homeowners to be prepared to present ALL THIS information.  Do not skimp on what you’re asked for.  It will only delay your approval if you aren’t prepared with this information.  Loss mitigators have hundreds of files on their desk all waiting approval and if you are missing information you risk your packet going to the bottom of that pile OR in some cases if you have a particularly nasty mitigator, they may close your file out all together.

Once you accept an offer, and again, I don’t care WHAT you’re offered because the important thing is the approval, not the offer or the listing price, your packet needs to be submitted to the lender.  Your negotiator whether it’s you, your agent, an investor, a lawyer, should then be taking the complete packet and submitting it to your lender.  

The most important aspect of the entire short sale is the negotiation.  What will you do if the lender denies your short sale?  That’s where an experienced short sale negotiator can open a shut door. 

After the package is submitted, the lender will likely order what’s referred to as a BPO or Broker Price Opinion.  That is where a contract representative on behalf of your lender visits your property and evaluates your home based on comparable sold property in the area.  This agent’s opinion carries a lot of weight with the lender.  You will have a tough time getting your short sale accepted if this person over-values your property.  When a BPO agent isn’t from the area, they may not know certain things about the town, such as a bad street or road, good street, crime rate, etc., and those things can affect the sale of a property.  A reason I don’t participate in HAFA short sales is the homeowner’s LENDER sets the sale price of the property based on their BPO evaluation.  If you don’t get a BPO agent that has experience with property in your direct area, the value of your property could be WAY off.

After the BPO agent determines their opinion of the property, they submit it to the lender (usually within 48 hours) and the lender will then make a determination regarding the sale.  Now there are MANY factors that can affect the speed of your approval or denial.  If for any reason the lender requests more information for you, you should be prepared to send it in as quickly as possible. Most negotiators will give you a time frame to respond to their requests and I’ve seen it be as little as 24 hours.  Again, keep in mind if they don’t get a response in the time they want they COULD close your file out.  Any time the lender requests paperwork such as updated pay stubs, bank statements or anything else, the homeowner should return that information to them as promptly as possible. 

A short sale is lengthy and it can take 30 days or more for the lender to respond after the BPO has submitted their information.  It’s important to be patient.

There are three possible outcomes for a short sale:

•1) The lender agrees to forgive the deficient amount. The deficient amount is the amount the homeowner owes minus the accepted sale amount. So for instance, a home that had a mortgage of $200,000 and was bought for $140,000 would have a $60,000 deficient amount. Most distressed homeowners can’t come to the closing with that $60,000 so the lender has the say on what happens to that $60,000. If the lender agrees to forgive the deficient amount, a 1099-C will be generated and the homeowner MAY have tax ramifications on that $60,0000. MOST homeowners will be deemed insolvent under the mortgage debt forgiveness act of 2007 and a homeowner could walk away at that point and never think about the house again. Only your accountant can tell you if you are insolvent. 

•2) The lender does NOT forgive the deficiency. They “reserve the right to pursue” the deficient amount. In this case, they are reserving that right to collect their $60,000. Now it doesn’t mean they WILL pursue the homeowner, only that they are reserving the right to pursue the homeowner. What homeowners in Massachusetts and New Hampshire need to be aware of is the statute of limitations is 6 years. They have 6 years to try collect that deficient amount. If this is the outcome of your short sale, you will NOT be issued a 1099-C. Please don’t be fooled.  I hear people say ALL day long they are going to negotiate your deficiency judgment.  NO one can negotiate your deficiency JUDGMENT!  When I hear that, I know it is someone inexperienced.  A judgment is handed down by the court and the only people that can negotiate it are lawyers and judges.  If you work with an agent, negotiator, mortgage broker, etc., they can only negotiate for your deficiency and NO one can tell you with certainty what the lender will do.

•3) The lender could ask for some form of payment at closing or a promissory note. So for instance they may ask for $12,000 in the form of a promissory note. This amount is usually spread over a few years. There is no way to tell what amount they will ask for or how long they will spread out the repayment of that amount.

It is important for homeowners to understand their options.  I’ve heard countless homeowners ask if the bank “reserves the right to pursue” the deficiency, do they have to proceed with the short sale?  The short answer is “NO” –  If the homeowner cannot live with the terms of the approval, they do not have to move forward, however, if they don’t proceed with the short sale and they default on their mortgage, the bank will foreclose and they will AUTOMATICALLY have a deficiency which could be larger than the short sale amount, PLUS they now have a foreclosure on their record.  There could be other ramifications if the homeowner backs out of the sale and they should always seek legal council if necessary.

The approval comes in a lengthy format with the terms of the short sale and typically a closing date.  Again, there is other paperwork that the homeowner may be required to sign for the lender, such as arms length transaction forms.  What many homeowners don’t realize is most of the time, they receive NO money at closing.  Because the lender is taking a loss, they don’t take kindly to the homeowner walking from the sale with money in their pocket.  I’m not saying that it can never happen, but if it does, it needs to be documented on the HUD form so the lender is well aware.  A buyer, Realtor, investor or anyone can ask to give the homeowner money, but the lender would have to approve that, and doing anything that is NOT listed on the HUD form may have legal ramifications.

Most homeowners in New Hampshire and Massachusetts have no idea how to get started with a short sale.  They are a large part of today’s real estate market and a great option for homeowner’s to avoid foreclosure.  Short sales are not going away any time soon.  The most important thing for homeowners is to educate themselves on the process and what is expected.  That will save them a lot of frustration later.

Maryann Little, VP Mitigation
Short Sale in Massachusetts
Massachusetts and New Hampshire Short Sales

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