It is a common practice for the lender to require the seller to sign an “arms length” affidavit as part of the short sale approval process. This arms length affidavit is intended to prevent the owner of the house from selling to a family member. It may also prevent the owner from selling to a business associate.
Why would the lender not want the owner to sell to a family member? The reason in part is because of the possibility of the owner and the family member creating a side deal whereby the owner may receive profit or some other benefit from the sale of the home. In order for the short sale transaction to happen, the lender must agree to accept less than the owner originally borrowed. The lender does not want the owner to “have their cake and eat it too”.
It is unfortunate that the underhanded dealings of a few impact everyone. I am sure there are cases when allowing a home to be sold to a family member would be of benefit to everyone involved, including the lender. The fear the lender has of mortgage fraud makes the likelihood of this happening nearly impossible in today’s market.
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