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Can You Purchase Your Home Back After a Short Sale?

Founding Member of Moshes Law, P.C.
During his years of practice, Yuriy has concentrated in litigation and real estate transactions as his areas of expertise.
can i buy back my short sale home

Buying a home with a conventional mortgage is often a dream for many Americans and a good dream at that. Life happens, however, and extenuating circumstances may cause many homeowners finding themselves unable to make their mortgage payments. In an attempt to avoid losing their home to foreclosure, which often results in bad credit and higher interest rates, the homeowner will attempt to engage in a short sale. While a short sale is often a good idea, there are many predatory or flat out fraudulent schemes being offered by individuals on the marketplace. Homeowners seeking to enter into a short sale must be aware of these scams.

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There is a lot of bad information on the internet regarding whether homeowners facing foreclosure can buy or lease back their homes after a short sale. Homeowners contemplating entering into a short sale transaction in lieu of foreclosure should be careful to completely understand the consequences of the short sale transaction and what they are legally entitled to do.

If you are facing foreclosure and want to explore your options, you may want to speak to an attorney. The real estate attorneys at Moshes Law, P.C. have helped hundreds of New York families navigate the foreclosure process, either by extending their time remaining in their homes or by avoiding foreclosure all together. Contact a Moshes Law real estate attorney today for more information. 

Can You Do a Short Sale to a Family Member?

Technically, there is no law prohibiting the sale of a home to a family member. The issue, however, is that you risk entering into a transaction that is not at arm’s length, which means that you could end up committing fraud. 

Arm’s Length Mortgage

To understand how selling your home to a family member may result in a fraudulent transaction, you must understand how a short sale works. In a short sale, mortgage lenders agree to allow homeowners to sell their homes on the market place. The homeowner will hire a real estate agent and seek the highest offer they can. Once a buyer is found, the mortgage lender will have to approve the sale. Once approved and the buyer pays, the sale proceeds will go directly to the mortgage lender and any unpaid principal or interest on the homeowner’s mortgage loan will be forgiven. 

This type of situation is called an “Arm’s Length Transaction” because all of the parties, the buyer, seller, and real estate agent, are operating at arm’s length. Arm’s length simply means that the parties are not colluding and that the sale price for the home is the price that the market will demand. In an arm’s length transaction, the mortgage lender can ensure that the home was sold for a fair price. 

In a non arm’s length mortgage transaction, the parties are somehow related or have an outside agreement. For example, take a homeowner facing foreclosure that has an outstanding loan of $500,000. The homeowner could sell the home in the open market short sale for $450,000 and the lender would lose $50,000. If that homeowner rejects the $450,000 offer and instead sells the home to their brother for $400,000 in a short sale, the lender loses $100,000. The brother could then sell the home back to the homeowner with a new conventional loan, which would result in the homeowner keeping the home and saving $100,000. In theory, there is no difference between this and the mortgage lender simply forgiving $100,000 of the mortgage balance. This is the type of non arm’s length transaction that the mortgage lender will seek to avoid.

Short Sale Affidavit

To ensure that the short sale is done in an arm’s length transaction, the mortgage lender will typically require that all parties to the transaction sign a short sale affidavit or arm’s length affidavit. An affidavit is a signed document under which the signor swears that the information in the affidavit is the truth. The affidavit will typically state that none of the parties, the seller or the real estate agent, have any relationship whatsoever with the buyer. Prohibited relationships can be family relationships, personal relationships, or business relationships. It will also state that there are no side agreements between the parties that the lender does not know about. If it turns out that one or more of the affidavit signors has lied, he or she may be liable for fraud and may have to pay damages to the lender. In addition, committing this type of transaction may also amount to criminal fraud in certain situations. 

Short sales can be very complicated from the homeowner’s perspective. While they are often better than going through foreclosure, a simple mistake like selling the home to a business partner could be costly. If you are exploring engaging in a short sale, contact a short sale attorney at Moshes Law for a free consultation today. 

Can You Lease or Buy Back Your Short Sale?

Many people wonder if they can lease their home or rent it back from the purchaser after they engage in a short sale. Technically, this is not illegal and can be permissible in certain situations. In other situations, however, it could easily amount to fraud.

If you recall above, the short sale affidavit is a requirement that most lenders will make homeowners and buyers in the short sale transaction complete prior to the sale. The short sale affidavit requires the parties to swear that there is no existing relationship between them, including a business relationship. If a buyer and a seller enter into an agreement with the understanding that the buyer will then lease the home back to the seller, this is a business relationship. Thus, entering into a short sale with the intention of leasing or renting the home back from the buyer without disclosing this on the affidavit could constitute fraud.

On the other hand, if this prior rental arrangement is disclosed to the lender prior to the short sale, and the lender nonetheless agrees to allow the short sale, then this could be permissible. That is to say that you can rent or lease back your home after a short sale only if the transaction is first disclosed to the lender and the lender approves of it prior to the short sale. 

Attorney for Job Discrimination

On the other hand, if this prior rental arrangement is disclosed to the lender prior to the short sale, and the lender nonetheless agrees to allow the short sale, then this could be permissible. That is to say that you can rent or lease back your home after a short sale only if the transaction is first disclosed to the lender and the lender approves of it prior to the short sale. 

Consequences of Breaking Short Sale Laws

There are two means by which you may be punished for engaging in mortgage fraud. The first is criminal. Mortgage fraud is a crime under the laws of New York State and under federal law. This means that an individual who engages in mortgage fraud could be prosecuted by both federal agents and state law enforcement. Punishment can include fines and or jail time.

The second consequence of engaging in mortgage fraud is the potential for a civil lawsuit. A civil lawsuit is brought directly by the mortgage lender or bank that owned the loan and approved the short sale. Being defrauded out of money, the mortgage owner will seek to recover the money they believe they lost due to your fraudulent activity. You may also be liable for other costs incurred by the mortgage lender, such as the costs of bringing the lawsuit.

How Soon After Short Sale Can I Buy Another House

A boomerang buyer is an individual who has previously lost their home and is now attempting to rejoin the housing market. As the economy improves, the industry is seeing more and more boomerang buyers fighting for their second chance at homeownership.

If you are contemplating a short sale, but are wondering when you can buy a house after a short sale, the answer should not be surprising. Getting another mortgage on a home after you engage in a short sale will not be an easy task. First, there may be a waiting period before you are legally allowed to enter into another home loan after your short sale. Whether there is a waiting period and its length depends both on the type of mortgage you seek to take out and how much you are planning to put down. These waiting periods can be as long as four years in some circumstances. 

Another barrier to purchasing a home after a short sale is that you may find them unaffordable. After a short sale, you may have a negative mark on your credit report, resulting in higher mortgage rates that may make monthly payments unaffordable. Thus, many individuals who went through short sales wait a number of years before they buy a home and seek to build their credit through the responsible use of credit cards and other tactics. 


What is a short sale?

A short sale is a transaction in which a homeowner facing foreclosure works with the lender to sell the home on the market for market price. The homeowner will find a realtor and market the home as would any other seller. Once an offer is found, the lender will have to approve the sale price and the terms. The proceeds will be used to pay off the homeowner’s mortgage balance and any outstanding amounts are forgiven. This allows the homeowner and the mortgage lender to avoid the foreclosure process.

How long can a house stay in short sale?

How long a home may stay in a short sale depends on the specific situation, including the type of loan and the lender. Generally, a mortgage lender will seek to have the home sold as soon as possible. If the home is not selling however, the lender may set certain deadlines by which the home must be sold. This means that the homeowner and realtor might have to accept the best offer extended by a certain date.

What happens if the bank does not accept the short sale?

If the bank does not accept a short sale offer, the home is not sold and it remains on the market. The buyer may also provide a counteroffer, which the bank may consider again. If the bank still refuses, the buyer will likely walk away.

Do banks prefer short sales or foreclosures?

Banks exist to make money. They do not lend to homeowners to help them accomplish the American dream. Accordingly, banks will prefer whichever option is cheaper for them and which results in them losing the least money. Oftentimes a short sale is quicker and cheaper than going through a foreclosure, meaning that most banks may prefer a short sale to a foreclosure.

Why do short sales get denied?

Short sales may be denied for a number of reasons. The most common, however, is that the bank is not willing to accept the buyer’s offer. This could be because the price is too low or because there are other contingencies the bank will not approve. Many banks have internal policies that govern when a short sale offer can be approved, meaning that there is not always room for negotiation. 

Can you purchase a home after a short sale?

You can purchase a home after you sell your previous one in a short sale, but it is not always easy. Depending on the situation, you may have to wait a number of years before you qualify for another mortgage.

Can I lease my home back after a short lease or rent my home from the new owner?

Generally, you can lease or rent your home back from the buyer in a short sale only if your mortgage lender has approved the situation prior to the short sale and is fully aware of the details of the rental agreement. Failing to disclose the arrangement may amount to fraud.

Need Legal Advice or More Information?

Short sales can be a great alternative to homeowners facing foreclosure. While they are quite simple in theory, a homeowner engaging in a short sale can easily make a costly mistake, such as unknowingly engaging in a fraudulent transaction. Our attorneys can assist you with this problem. Also, if you wondering how to stop a foreclosure auction or even foreclosure, do not hesitate to use free consultation.

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If you are contemplating a short sale, an experienced real estate attorney at the Moshes Law Firm, P.C. can help guide you through the process. Contact us today for a free short sale consultation.

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