Massachusetts Short Sale FAQ’s

Why would a borrower want to do a Short Sale?

Short Sales are a benefit to homeowners because they are typically able to stop mortgage foreclosure and when negotiated properly prevent the lender from suing the homeowner. Deficiency is the difference between what the lender would have received under the contract and what the property finally sells for. In Massachusetts this shortfall can often be hundreds of thousands of dollars.

By entering into a voluntary agreement with the lender, you ultimately stop foreclosure and your credit report does not merit a FORECLOSURE entry. This puts you in a much better position to qualify to buy another property in the future, especially with current FHA underwriting requirements.

Through our negotiation process, we negotiate for the lender to forego suing you for any monies which they write off associated with the Short Sale transaction.

A Short Sale transaction also provides peace of mind and predictability because you know exactly when the sale will close, and thus when you will need to vacate the property. There’s no risk that sheriff’s deputies will come to your door one morning to evict you.

Why would I hire a real estate attorney to do a Short Sale for me?

Negotiating a Short Sale is a difficult process, generally because the lender will require certain documents and information, but too much information or documents in the wrong format can completely destroy a transaction. Specifically, the lender will require documents demonstrating the property value, and then will verify such value with a broker’s price opinion or “BPO.”

Additionally, the lender will ask for financial information about the borrower. The borrower typically must now convince the bank that he/she can no longer make the payment on the house and is unable to sell it for what is owed. Think of it as a backwards loan application. It is important to give the lender precisely what they want at this stage without lying (often including bank statements and tax returns), but also paint a grim picture of the borrowers financial circumstances.

This stage is the most sensitive because the borrower must prove they do not NOW have the income to make the payments, but at the same time the borrower must be careful not to implicate themselves in mortgage fraud from when they applied for the loan and “proved” to the lender they DID have the income to make the payments. It is critical to be properly represented through this process by a qualified Short Sale attorney…for your own protection, especially given some of the tactics used by unscrupulous mortgage brokers to get homeowners into loans in the past few years.

What are the tax implications of a Short Sale?

The tax situations of individual borrowers are different, but in general, any 1099 income generated by a Short Sale is usually offset by the loss the borrower took on a bad investment. Often, critics of Short Sales look only at the 1099 income without considering the benefit of the offsetting deduction for the loss on the property.

The bottom line on taxes is that the tax year in which the borrower completes the Short Sale is a complicated one, and it is critical to have a Certified Public Accountant prepare taxes for that year. It is easy to miss the deduction. Don’t let it happen to you. To our knowledge we have yet to hear from a client who has had to pay on an issued 1099 because of all of the exclusions. It is important to speak to your CPA in the year in which you experience the loss, we unfortunately are not tax professionals and are unable to advise or assist you on these matters.

What is a short sale?

A short sale occurs when the property is sold for less than the loan amount with the cooperation of the lender. It permits more owner control over the process and less credit consequences than a foreclosure. Not all lenders will accept short sales and not all owners or all properties qualify for short sales.

What are the qualifications for a short sale?

Both your property and you have to qualify for short sale consideration.

How does the property have to qualify for a short sale?

Comparable sales must substantiate that your home is worth less than the unpaid balance of your loan. These comparables are identified in a document called a BPO, a Broker Price Opinion letter.

How do I qualify for a short sale?

1. Typically you must prove a hardship that makes it impossible to continue making loan payments. A hardship is the result of a circumstance beyond your control that forced you into a position where you can no longer afford loan payments. Some examples of hardship include:

a. Unemployment or loss of a primary income source
b. Inability to work due to health crisis
c. Mounting medical expenses
d. Employment relocation
e. Business failure
f. Bankruptcy
g. Death of spouse or significant other
h. Divorce or separation
i. You must move from your home

What if I am not experiencing a personal financial hardship? It’s really my loan and the value of my home that creates the hardship.

For many people these days, their loans have adjusted up so rapidly that it doesn’t makes sense to pay such high loan payments for a property that has declined so much in value. For some lenders, these factors alone spell sufficient hardship to qualify for a short sale, especially if you are in default on your loan. The bottom line they look at is will we lose less if we short sale than if we foreclose.

What if I have assets?

Many lenders do not consider your asset-based status. They generally just look at your debt to income ratio. If they do consider your assets, they will probably approve the sale but may require some payment from you.

Must my loan be in default?

Some lenders no longer require you to be in default on payments to consider a short sale. However, they must be convinced by your short sale negotiator that you intend to default if they do not agree to a short sale. It can be challenging to convince your lender that you will default tomorrow if you have not defaulted in the past. However, ceasing to pay your mortgage puts you on the track to foreclosure.

What is the objective of a short sale?

There are two objectives of a short sale. The first is for a buyer to make an offer to purchase your property as soon as possible for an amount in line with the market bottom for properties comparable to yours. This is the job of the real estate agent. The second is overseeing the short sale to insure it will be approved, presentation of a multi-part package to the lender resulting in approval of your sale, forgiveness of the loan amount shorted, and mitigation of the resulting liabilities to you. This is the job of your attorney.

The Real Estate Agent Job
Working with Real Estate Agents/Brokers: Many people are using real estate agents/brokers these days to negotiate their short sales, and this is great as many of them are excellent at what they do, however we do recommend using an attorney in the process. Either to assist with the negotiations for an approval if needed or to review the contracts and approvals sent by the lender to make sure your legal interests are adequately protected. Real estate agents are not attorneys and are also subject to liability for guiding their clients in the wrong direction or not informing them of any legal liability they may be facing, so utilizing an attorney helps all involved, real estate agent and homeowner. For our full service short sale negotiations we include deficiency judgment, 1099 issuance and credit report negotiations for every one of our short sale or deed in lieu of foreclosures. We also offer these services on an ala carte basis. We work with realtors all the time.

How will a short sale impact my credit?

A short sale, or deed in lieu according to credit experts are equally as damaging to your credit, although it depends on how many months (if any) you were required to be late on payments, or if you were already late on your payments. They come under a category called ‘customer did not pay as agreed’. However, it is believed that legislation may soon be enacted significantly minimizing credit damage for short sellers. For now, there is one credit advantage a short sale confers. Currently you will be able to obtain a home loan in 2 years whereas you will have to wait about 5 years for a foreclosure. Please check with your lenders guidelines about obtaining a mortgage as these are subject to change.

Will I have liability for the difference between my lender pay off on short sale and the loan amount?

There are two types of resulting liability. The first is a deficiency judgment which is a civil judgment in favor of the lender for the difference between the amount paid the lender and the amount of the loan. The other is tax liability. These liabilities are explained below.

What is my potential liability for a deficiency judgment?

In most states, including Massachusetts the mortgage company can obtain a defeciancey judgment against a homeowner. It is essential that you discuss this potential issue with ALL short sale clients

Will I still owe the lender for the difference between my lender pay off on short sale and the loan amount?

This is commonly called debt relief which is considered taxable income. If your lender gets a deficiency judgment against you, there will be no tax liability because you are not relieved of the rest of the debt. If the lender does not pursue a deficiency judgment, they may issue a 1099-C to you for which you will incur a tax liability. This amount must be reported by you as income. However, the recently enacted Debt Foregiveness Act of 2007 exempts principal residence homeowners from payment of debt relief tax. You may still have to report debt relief on your state return, however. Talk to your accountant.

What are the benefits of a short sale as opposed to a foreclosure?

The primary benefits of a short sale are to limit and control damage in these ways:

1. The highest possible sale price is important to you since you may have tax liability for the difference between the loan and the short sale proceeds or owe this amount back to the lender in the form of a deficiency judgment. In a short sale, you take proactive steps to receive the highest possible price on the open market. In a foreclosure, the price will always be less, which increases your liability.

2. If you take action so the lender does not have to foreclose, the lender will be more inclined to legally forgive the amount they are shorted instead of obtaining a deficiency judgment against you (if you fall in that category; see deficiency judgment, above).

3. Your credit will be negatively impacted for 3 to 5 years depending, but this is much less than a foreclosure and showed that you tried to mitigate your circumstances instead of walking away and doing nothing.

4. To be proactive and in control of your life. In a short sale, you are in charge. You hire your negotiator and the agent to list your property for sale. You decide what the list price should be and you respond to the offers that are received. You are involved when we negotiate acceptance of the offer by the lender. We work with you and the lender to minimize any resulting liability to you. You know when the time is right to move on to another home. You feel far more empowered because you are in control and have taken the best steps to minimize and control your loss.

When Should I begin the Short Sale process?

As soon as you understand that you will have difficulty making your payments. You do not have to be in default on payments. The sooner we can begin the negotiations with your lender, the greater the chances of a successful resolution at the highest possible sale price.

What does the short sale process consist of?

The short sale is a multi-step process consisting of the following:

1. Pre-qualification of your home and you.

2. Pre-qualification of the lender.

3. Hiring the real estate agent, setting the list price and a schedule of price reductions.

4. Analyzing and packaging your financials.

5. Documenting predatory lending violations by the lender.

6. Negotiating offers with the lender.

7. Negotiating post-sale liability and credit reporting with the lender.

How Long Does a Short Sale Generally Take?

It can take too long to even be reviewed by your lender before the foreclosure sale or the buyer withdraws the short sale offer. That’s why it is important to begin the process as soon as you know you are challenged. Typically a short sale is completed within a few months from the time we have an accepted offer to submit to the lender. If the foreclosure trustee sale is imminent, we have successfully negotiated a short sale in as little as a few weeks. Timing depends on how quickly we can begin negotiating with your lender and how receptive they are to working quickly on files. The sooner, the better.

Can the process be expedited if I am facing foreclosure or an auction date has been set?

If you are imminently facing foreclosure or even if an auction date has already been set, the process can be expedited, but this depends. But, why wait this long and deal with the resulting stress. Be proactive. Don’t wait until the last minute and don’t ignore the notices sent to you by your lender. If you are not sure what they mean, we can help you review them.

It all sounds so negative. Where are the positives?

Losing your home is high on the list of life challenges. But, it can represent an opportunity to realize that life is so much more than the temporary loss of a home that has become too expensive. Do you have family by your side? Are you healthy? Do you have a faith in something greater than yourself? Life is full of challenges. It is all up to you how you respond to them. You will be able to have a home again in a few years and in the interim, take a break from house payments. Lease a nice house, pay a lease price and sit back and count your blessings as you save the down payment. Then, when you’re ready, scoop up a deal on your next home. Maybe this time you will be a short sale buyer yourself.

Why are we different from other short sale negotiators?

When you speak with us you will know that you have found highly skilled licensed professionals to get you through what can be a complicated, lengthy process in the best possible way. With us in your corner, you will feel empowered instead of disempowered. You will understand that there is light at the end of a tunnel that is not as long as you thought.

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