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Can You Short Sell Your House To A Family Member?

Can you short sell your house to a family member?  Arms Length Agreement & Fraud.

So here is the big question everyone asks. Is it possible to short sell my house to a family member? A lot of individuals who want to short sell their home to a close friend or relative usually have good intentions. However, due to various reasons, a lot of the time the banks wont allow it. In this article we describe why the banks do not permit you to short sell your house to a family member or friends, and when the exceptions to the rule does apply.

Banks dislike short sales period. There’s no going around how they feel about it. In the end, they are the ones who  are setup for a loss on the balance sheets of the bank at the end of the quarter. So when a a short sale is approved by a bank, it makes certain the house is being sold at a competitive cost on the open market. Among the rules banks use to ensure this occurs is by demanding the deal to be an “arm’s length” transaction. When purchasing the home, this rule prevents a relative or friend from buying the house from you.

Here is a recent question asked by a homeowner.

Dear Real Estate Law Adviser,
I am trying to to sell my house in a short sale to a family member of mine. I did not sign an  sign an arm’s-length agreement and wanted to know if it is legal for me to sell my house to a family member with a short sale?
— Martha F.


Dear Martha,

Short Selling Your House To A Family Member does happen from time to time. However, lenders do not like this type of scenario knowing that it can lead to mortgage fraud. Therefore it is illegal in most lending situations or deals. Moreover, government and other government-related entities such as FHA, VA, HUD, Fannie Mae, Freddie Mac and the FDIC are taking this matter very seriously. There are cases where they have gone back to past deals they have done just to find out if it has violated an ARM’s length transaction. If it looks as if the family member has profited the bank may look at it as though it is fraud.

Arm’s Length Transaction Rules

An arm’s length transaction is an arrangement made by a different parties who would not have a unique relationship with each other. For example, the parties aren’t connected; they don’t run business together then it’s not related to the trade at hand. This ensures that they would not have an undisclosed side deal associated with the transaction.

What Does HUD Forbid

In case your intention would be to stay together with the associated buyer as your landlord in the home, arm’s-length provisions also say that buyers can not purchase or lease the property back to the seller. Any conflict of interest, appearance of a disagreement or self dealing by the parties to a trade (borrower, lender, appraiser, purchaser, etc.) is strictly prohibited.”

Among the reasons for this is that the seller’s debt needs to be completely satisfies in the event the mortgage balance isn’t satisfied by the profits; therefore, they do not take kindly to in sellers who still owe money or buyers that are slickly benefiting in the deal.

Ask About Any Exceptions To The Rules

You’ve got nothing to lose by asking your lender. The bank probably does not actually care who purchases the property; it only cares that the price  approved is the greatest price the marketplace has to offer. Should you offer to spend money on the lending company record that other offers have been below the cost your relatives have offered and to appraise the property, the bank may have the ability to permit a deal to a relative. These measures will show to the lender the property is being sold for the maximum price the market can give.

Other Available Options or Alternatives

Possibly the same relative would be prepared to purchase another house out there in the exact same area that you can let for those who have a relative willing to purchase your home through a short sale. Your children could stay in school and their area. Proceeding would be comparatively simple and whatever arrangements for rent or long term possession you were intending for your present house you can apply to the brand new house.

Purchase your home at auction for cash, even though the bank will probably only run the play up to the sum they are owed including back-payments and all fees.
Purchase your home right after the lender forecloses on it and places it in the marketplace, although this may cause a blemish that is worse in your credit.

Certainly, the kind of non-arm’s-length transaction deal you are contemplating can still happen when connected parties play slow, say representatives who manage short sales. However I wouldn’t risk trying to sell your house to a family member!

Practice the Rules

In certain lending groups, finishing a transaction that’s not at arm’s length is recognized as fraud. The Federal National Mortgage Association looks by a connected party as evidence of fraud if not real fraud upon any purchase offer. Many lenders will require the seller at close to sign an affidavit checking that they’re not related to the purchaser. Following through on the deal in contradiction to the signed agreements between lender and seller may create a breach of contract or fraud.

To sum up, the right response to the question “Can you short sell your house to a family member?” is no! The reason being is the fact that banks typically contain an arm’s-length transaction to a short sale contract which makes short selling to a family member prohibited. The reason banks do it is to control mortgage fraud or to stop the seller from profiting from the trade. Nevertheless, exceptions do exist and should you request the bank for one, you don’t have anything to lose.


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