If I take an equity line advance and then request a short sale a few months from now, can the bank “clawback” the equity line advance?

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If I take an equity line advance and then request a short sale a few months from now, can the bank “clawback” the equity line advance?

My unemployment benefits ran out and I am thinking on tapping my equity line for $8,000 to make the next couple months of first mortgage payments and payoff my credit card and friends for whom I have borrowed. Both loans are with the same bank and my only non-house asset is my IRA. If I need to request a short sale in three months from now or subsequently enter foreclosure, can the bank clawback the equity advance. Silly me paid down the equity line by $10k last year when I received a workers comp settlement.

Asked on December 12, 2011 under Real Estate Law, Michigan

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

The bank can only seek recovery of the monies advanced under the equity line if 1) you breach the terms of the line (so review all agreements pertaining thereto) or 2) you committed fraud in taking it out or using it (e.g. borrowed money with no intention of paying it back). Therefore, depending on the circumstances, if the bank believes it can show an intention on your part of not repaying, it may be able to immediately seek rescission of the line.

More to the point, it's very unlikely the bank would approve a short sale under the circumstances you posit--remember: it is completely voluntary on the part of banks whether to allow a homeowner to sell his/her home for less than the outstanding balance of loans without remaining liable for that balance. Thus, you would either be unable to sell your home short, or if you sold it short notwithstanding a lack of bank approval, you'd still be liable for any amounts due on a mortgage or equity line not paid off by the proceeds of the sale.


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