Moe Mojahed
Designated Broker
Arizona Home Source Realty LLC.
Direct: 602.390.7777
Soraya Mojahed
Real Estate Consultant
Bank Require an Arms-Length Affidavit on a Short Sale?

What is the reason for an Arms-Length Affidavit on a Short Sale?

An arms-length affidavit is a document created by a short sale bank in an attempt to prevent sellers from selling to a relative and to curb mortgage fraud. The reason the bank does not want a seller to transfer title to a relative in a short sale is because seller cannot benefit from short sale.

Sometimes sellers make side agreements with relatives or friends to act as a straw buyer. Then, after the transaction closes, those pretend buyers quickly transfer title back to the seller. This practice, in affect, means the sellers have repurchased their home at maybe half the cost, which greatly benefits those sellers. But banks make the rules, and banks say sellers can't benefit. If they wanted sellers to benefit, they would have agreed to a loan modification.

What Does an Arms-Length Affidavit Contain?

Most banks create their own arms-length affidavits. Therefore, the language can vary from one affidavit to another. Following are the points contained in a basic arms-length affidavit:

  • The arms-length affidavit references the property address, name of the sellers, buyers and agents, and the fact this is an arms-length transaction.
  • No party to the short sale contract is a family member, business associate or a person who shares a business interest with the seller.
  • There are no hidden terms nor special agreements among the buyers, sellers and / or agents.
  • Once the transaction closes, the sellers will not rent back the home nor regain title to it.
  • None of the parties will receive any compensation except for the commission paid to the agents.

    If you sign an arms-length affidavit on your short sale and then violate it, you could be held liable for mortgage fraud. Mortgage fraud falls under jurisdiction of the F.B.I. Moreover, if anybody tells you that it's OK to sell to a relative, make sure that you clarify your relationship with the buyer to the bank before closing. I don't know of any banks that will let you do it.