Can a Trust of Which I Am a Beneficiary Make a Short Sale Offer on My Home?
Short sales became a popular means of resolving mortgage delinquency on underwater loans after the housing crisis began in 2007. Short sales involve selling a home for less than the balance owed. Lenders prohibit collusion, the secret cooperation between parties to a transaction in order to commit fraud, between parties to a short sale. Collusion gives lenders an unfair disadvantage as participants profit from the distress sale. A trust purchasing a beneficiary's short sale home may be considered collusion.
Other People Are Reading
-
The Basics
-
Most lenders have always required short sale transactions to be at arm's length; that is, all parties work independently of each other and in their own best interests. Generally lenders require that the seller, buyer, real estate agents and mortgage professionals show there is no collusion. Revealing to a lender that the borrower-owner is a beneficiary to the trust buying the home will likely disqualify the transaction as arm's length. Not revealing this fact is essentially fraud, as the buyer and borrower have a business relationship, and most lenders require all parties to sign an arm's length affidavit ensuring they are operating independently.
Types
-
There are various types of short sale fraud that arise from collusion. Flipping, the immediate sale of a short sale property at a higher price, is a common example. The buyer of a short sale may sell the home with little to no repairs or improvements at a substantial profit. Selling the home back to the borrower at a lower price, making it more affordable for him, is also considered fraud, as the borrower is not supposed to benefit from a short sale. Generally, the borrower may only accept a monetary incentive or arrangement that is pre-approved by the lender.
-
Warning
-
Straw-buying, the use of a familiar third party to purchase a home for another that is unqualified to buy, is considered mortgage fraud. A borrower that sells her home to a trust of which she is a beneficiary violates the arm's length requirement. Additionally, the trust may also be seen as a straw buyer, because the borrower-beneficiary can eventually benefit from this asset by gaining the house or a profit from it in the future. Fannie Mae calls these practices "Fraud for House" and "Fraud for Profit."
Considerations
-
The types of trust contracts vary. Under a trust ownership, the beneficiary essentially has no control or ownership over the assets held. In a short sale situation, however, all terms of the contract must be disclosed to the lender so it can make an informed decision as to whether or not to accept less on the sale. Withholding any relevant information that might affect the lender's decision can be considered fraud. The exact terms of a a short sale or arm's length affidavit may vary by lender. If in doubt about the legality of a short sale transaction, consult a real estate attorney.
-
References
- Photo Credit PhotoObjects.net/PhotoObjects.net/Getty Images
