Q. I owe more than my house is worth and I thought I could never sell it because I can’t pay any balance I might owe. Now I am five months behind in my mortgage payments and getting foreclosure notices. I thought it would be great idea if my mom could buy my home through short sale and then I could rent from her. However, the real estate agent I spoke to told me that none of my relatives can buy it. Does this guy even know what he’s talking about? What’s the difference if the bank’s getting their money?
A: Your real estate agent’s advice is accurate.
In fact, banks require sellers of short sales to sign off on what’s called an “Arm’s Length Transaction.” This means that the seller does not know either the buyer of your property by direct familial relation or business relation, and even that you’re not related to your real estate agent.
Your lender’s main objective is to get the most of their money back that they can. This means they are looking for the highest and best fair market value for your home. In addition, mortgage lenders will only entertain the idea of a short sale if you show you are unable to pay off your loan if you sell it, that you can’t afford to keep it, and if it appraises for the price it’s being sold for.
To go a step further, another way for the mortgage lender to be sure that they are not getting scammed out of their rightful monies due, they need the transaction to be “Arm’s Length” plus they need to be sure that you’re not putting undue pressure on the buyer because you know her.
The difference is, in a short sale, the bank isn’t getting their money — at least not all you owe them. If your mortgage lender gave you $200,000 to buy your home, they expect their $200,000 back fully, and with interest. That was the deal. If they approve your short sale, and they agree to let you only pay them back $150,000, essentially you’re “shorting” them $50,000.