Will short sale affect family trust that was cosigner on loan?

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User question: My wife has a condo from before we were married. It is an interest only adjustable rate loan. The condo is worth less than half of what she bought it for. The loan was co-signed by her family trust. We are now married and would like to do a short sale or foreclose on the condo. We can clearly show that she can't afford the property. Can this be done without the the family trust being affected? Need guidance on Arizona real estate law. Would they bank come after me now that we are married?

Answer from blueroof.com: I will do my best to answer your question. There is information I would need to know about your specific situation to make sure I answer your question accurately for your specific situation though. 

First, it is highly unlikely that you will be able to get the short sale done without involving the family trust in some way.  As a co-signer, they are on the loan as well and so some information will need to be provided to the bank.  This is where knowing which bank, or banks, are involved will be crucial as some banks go through things in more detail than others.  Some banks may not require anything from the trust while others may want very detailed information.  But as a general rule, plan on them requiring information from the trust. 

As for your other question, the bank is only legally allowed to collect from the borrowers.  In this case, it is your wife and the family trust.  There could be some extenuating circumstances where a judge could rule you liable as well but that is a far fetched possibility and the likelihood of a situation arising where it would go in front of a judge is very slim.  So again, without knowing specifics, it is hard to answer but the general rule is they should not be able to come after you.  Only after the borrowers.

As far as Arizona state law is concerned, any loan that was used to purchase a property (referred to as purchase money loan) that is single-family up to 4 units and on less that 2.5 acres of land, is considered a non-recourse loan in the event of foreclosure.  So this simply means that in a foreclosure they would not be able to come after any of the borrowers since this is a condo and would meet the criteria above.  So unless your wife took out a large sum of equity at some point on a home equity line of credit and used that money for a car or vacations etc. they have no recourse to come after her for money after a foreclosure. 

Again, this is where I would need specific information regarding your loan or loans to give the best information.  While the statute does only apply to foreclosures, banks apply it to short sales as well because they know there is no reason for a homeowner to short sale if the bank is going to come and collect on a deficiency. 

If you would like to talk in more specific detail regarding your situation and what can be done to eliminate this stress from your lives, please contact us and we will be happy to come meet with you regarding your options.

*Nothing here is considered to be legal or tax advice. Any and all questions regarding tax or legal issues need to be directed to an appropriate and licensed professional.

Joe Duffin
Managing Broker for Blue Roof Realty

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