Lying To Mortgage Lender About Sales Price To Avoid Short Sale

Added January 28, 2008 by Ilyce R. Glink

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Summary: A homeowner wants to avert a short sale and asks his friends to buy his home. He asks them to lie to the mortgage lender about the price. Lying to the mortgage lender will put his friends in a bad position.

Q: Our friend has a house for sale. Unfortunately, he owes more than it's worth. He has a mortgage of $770,000 on it and cannot afford to come to the closing with any money.

He is willing to sell the house to us for $700,000, and wind up with a net loss of $70,000. He'd like us to take out a loan for the $770,000 interest only. He would make the interest-only payments of $70,000 until he can make payments to erase the $70,000.

Do we have to notify the lender who would be giving us the loan of $770,000? Is this illegal to accept payment from the seller on the side for the $70,000?

A: So your friend would like you to buy his home and not be truthful to your lender (and perhaps his lender) about the transaction. That would be wrong and may even be illegal. If your seller is selling you the home for $700,000, then your disclosure to your lender should be a purchase price of $700,000.

The seller intends to have you buy the home for $770,000 and then intends to pay you back $70,000. The net effect is a $700,000 sales price.

Your seller wants to pay back his lender and avoid a short sale. A short sale is when you sell the property for less than the loan amount and the lender accepts that payment as full payment for the amount owed.

The seller's credit may take a big hit for failing to pay off the loan in full and may even have to pay federal income tax on the $70,000 that was not collected by the bank. (If the home is the seller's primary residence, the federal government recently changed the rules and the seller would not have to pay tax on the amount that was forgiven up to $2 million.)

Your best bet is to avoid the transaction your friend is proposing. If the house isn't worth $770,000, but it is worth $700,000, and you're willing to pay that amount, your friend should try to negotiate with the bank to accept the short sale. As part of this agreement, your friend could negotiate with the bank not to report the short sale to the credit bureaus as an adverse credit issue.

As an aside, if the property is really only worth $700,000, and you need a loan to purchase it, your lender will send out an appraiser to determine the value of the property. If the appraised value is $700,000, your lender will never give you a loan for 10 percent more than the purchase price.

If the appraised value of the home is really $770,000, then your friend should attempt to sell the property for that amount and pay off his debts in full.

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