Jan
06

Do Short Sales Hurt Your Credit?

By
Dave Peeples asked: Of course they do. The real question that people facing this question really want to know is, “How bad do short sales hurt your credit?” The answer to that question is not simple. It depends on a wide variety of influencing factors to include, number of missed payments, credit score before mortgage delinquency, lender policy, and other credit factors. To be comprehensive, this article will focus on the two real issues that borrowers facing foreclosure should be concerned with: their credit score and their ability to get a home mortgage in the future. These are two completely separate issues that are commonly confused when this discussion occurs. With regards to credit scoring, their are two main factors that affect a delinquent borrower’s credit score. The first factor is the accumulation of missed mortgage payments. Credit agencies do not view missed mortgage payments in favorable light. After a payment is 30 days passed its’ “due” date, it gets reported as a 30 day late. After the payment is 60 days late, it becomes a 60 day late, and so on. The more delinquent the payment, the more is hurts the credit score. Here is the part that most people do not realize, a 120 day late payment gets factored the same as a foreclosure. Yep, you read that correctly. I will write it one more time, a 120 day late payment is scored the same as a foreclosure. It gets recorded as a Score Reasoning Code 22, serious late or delinquent account. There is no specific reason coding for foreclosures, short sales, deeds in lieu of foreclosure, etc…They are all treated the same. The reasoning is that a late payment is considered a default because it has not been paid as agreed. A corresponding but separate issue for challenged borrowers to consider is their future ability to get a new loan. The majority of loans are written in order to comply with Fannie Mae guide lines. This allows the new loans to be sold to investors, and thus makes them “liquid”. Historically, Fannie Mae did not differentiate between foreclosures and short sales. They were both considered situations in which the borrower did not repay the loan as agreed. Therefore, Fannie Mae required borrowers with a foreclosure or short sale in their history to have these closed accounts “seasoned” for four years before becoming eligible for a new loan. In other words, in addition to repairing their credit the borrowers were sent into a type of mortgage “time out” for four years until they could get a new loan. In June of 2008, Fannie Mae issued new guide-lines which formally recognized that short sales are in fact different than foreclosures. The new rules stipulated that those with a foreclosure in their past had to wait five years before getting a new loan, while those with a short sale have to wait two years before getting a loan. This measure will go to great lengths to incentify borrowers to seek an agreeable solution to foreclosure with their lenders. Kansieo.com
 

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