REAL QUESTIONS - HOW DOES A SHORT SALE AFFECT CREDIT SCORES???

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY
http://activerain.com/droplet/hR4

In a discussion today with a client we addressed the question of credit scores and short sales.  This is a hot topic and there is information everywhere on what happens and when and for how long.  No where have I found information that I would swear by, and for this reason I am posting this Blog.

The question is, "HOW DOES A SHORT SALE AFFECT CREDIT SCORES?"  The obvious follow up question is, HOW DOES A FORECLOSURE AFFECT CREDIT SCORES?"

My client had a discussion with someone who says they have experience with the ISAAC scoring methods, and here is the email (in somewhat redacted form to protect names).  Please discuss in this Blog what your REAL experiences are with this subject -- PLEASE - NO SUPPOSITION.

The email goes like this:

A short sale will be reported as "settled," but that's not good.  Settled is considered seriously negative by scoring models. It would be better if they just showed it as paid $0 balance and left it at that.  But you won't have any say so over how they report it.

I know you're getting conflicting info but the only source that you should be listening to is someone from Fair Isaac.

Those other parties that you mentioned don't know their way around credit scores. And the worst are mortgage brokers and realtors. I can't tell you how many messes of theirs I've cleaned up in my time. In fact, I place the majority of the blame for the meltdown on brokers and realtors. Being commission based is too tempting for many people to do the right thing.  I'll tell you how it's treated so you can stop getting the run around...

Short sales are as bad as a foreclosure. Credit scoring models have what's called a "Performance Definition" or Perf Def in my world. A Perf Def is essentially what the model's primary design objective is. The FICO score's Perf Def is to predict likelihood of someone going 90 days past due or worse in the subsequent 24 months after scoring. A settlement (or short sale) is considered payment not in line with original contract terms so it's treated by default as negative.

Anything that's treated as negative (or "major derog") is for all intents and purposes the same. So, a settlement is the same as a repo, foreclosure, charge off, collection, etc etc.  It may be better from a lender's policy perspective but not from a scoring perspective.

So there you have it.  Active Rainers - if you have REAL real life experience and can comment on the statements made above, please do so and we can all learn together.

Copyright 2008 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com.  See our easy to find articles at Need Short Sale and Modification Information? - These Articles Probably Answer Your Question

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Re-Blogged 2 times:

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Anonymous
Joe the Realtor

Choc, a Short Sale is when a lender agrees to let you sell your home for less than what is owed on the mortgage. For a primary home there is typically a minimal impact to you. However, in order to qualify for a Short Sale there needs to be some kind of Hardship that will show the lender that you either can't make your mortgage payments, will soon not be able to make your mortgage payments or some other circumstance that will affect your ownership of the property; such as a divorce or a relocation due to employment. Unless there is another factor for the sale of your home, I don't think a bad neighborhood in itself will qualify you for their consideration. Also, there are some lenders that require that you are behind on your mortgage payments.

I suspect that answer will bring out more questions.

Nov 25, 2008 08:53 AM #96
Rainmaker
254,644
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Choh -

Threshold question I have is what does "through FHA" mean?

If you have an FHA mortgage there may be several programs available to you and the place to start looking is at the FHA website www.fha.gov. Also see my article at BAILOUT FOR HOMEOWNERS - WITHOUT WALL STREET.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

SEE A TABLE OF CONTENTS OF MY ARTICLES AT Need Short Sale Information? - These Articles Probably Answer Your Question

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com

Nov 25, 2008 09:11 AM #97
Rainmaker
495,846
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Richard - Which would be better on credit- Seller who misses 12 payments, then does short sale, or seller who misses 6 psyments and does deed in lieue of foreclosure?  If short sale and deed-in-lieu are scored the same, I am guessing the latter.  However, the "foreclosure" itself becomes a credit issue, does it not, on future loan apps.  Isn't  there the question "Have you ever had a foreclosure" on mortgage apps?

Nov 26, 2008 10:32 PM #98
Rainmaker
254,644
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Wendy - I don't profess to have great knowledge on credit scoring and that was the reason I originally posted this question.  As you can see, the answers are all over the place.  I am working a a definitive researched answer but I don't have it yet.

I can answer the last part of your question - a deed in lieu of foreclosure can occur without the filing of a law suit, or it can be agreed to after the filing of a law suit.  Indeed, it can be agreed to after a foreclosure judgment but before the actual sale occurs.  Whichever, the public record will pick up merely the deed, unless a court judgment was also rendered.

It is the report made by the credit reporting creditor (the lender) that determines how it is going to be reported.  That much seems to be a consensus from those that write on this blog.  For example, there is no special computer code given to a deed in lieu of foreclosure by the clerk of the court, so there is no rapid search method for a credit reporting agency to pick up the type of deed, unless it is reported as such by the lender.

As far as your first question on the 12 months or 6 months, we have not had any reports from our clients regarding significant differences between credit hits for 12 months vs. 6 months of delinquency followed by a short sale.

A note about deed in lieu - our office has not seen one offerred nor accepted by a lender in over a year.  The lenders seem intent of getting the house sold through a short sale and foreclosure is a last resort usually reserved for uncooperative 2nd mortgagee situations.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

SEE A TABLE OF CONTENTS OF MY ARTICLES AT Need Short Sale Information? - These Articles Probably Answer Your Question

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com

Nov 26, 2008 11:03 PM #99
Rainmaker
495,846
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Thanks, Richard.  I had one recent short sale seller with Countrywide mortgage actually get "pushed" to do a deed-in-lieu from CW.  When he told them he was trying for a short sale, they said "You are approved for deed-in-lieu, if you don't take it now you may never be able to."  He was intimidated, and just wanted to end the whole ordeal, so went forward.  I am seeing a trend with sellers started not to care at all about credit.  They state, iMy credit is shot anyway, I won't be buying a house again anytime soon, etc." Or they say,  "Credit is the least of my problems."

Nov 26, 2008 11:17 PM #100
Anonymous
mike

I am in the same situation as choh(almost)

never been late, current on all bills...etc.

but I live in Poinciana(kissimmee ,fl) a huge nieghborhood 26,000+homes of which 40% or better are in some stage of forecloser...I bought back in 2005 (the front side of the bubble) @ $200.000. in 06 my home was bieng sold for 330.000 and many spec homes where built when the bubble popped the builders liquidated what they could and ran....the current situation is this...there are 90 4 bed 2.5 bath 2 story 3000 sq ft homes listed on mls for $99,000 in poinciana and many other's 3/2 in the 75,000 range...brand new never lived in!!! look up zip code 34759 to back it up!

I need to relocate to T.N. to keep my job with in the next year so I have no chioce but to short sell...my bank sent me a packet and I am in need of a realtor to help me through the process.

my question is on the credit side of the house...if I want to buy it seems 2 years is my waiting period...what about a construction loan if I choose to build v.s. buy? i do own land in T.N. 

Dec 02, 2008 10:21 AM #101
Rainmaker
1,138,599
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Mike, If you need help in Poinciana let me know. That's my area. I'm a broker and can work hand in hand with Richard. Richard sent me over here to respond to you so I'll leave my website for you www.buypoinciana.com

 

Dec 02, 2008 12:02 PM #102
Anonymous
Tim

Richard,

I am current on my mortgage.  Never missed a payment.  I need to move because being accepted into pharmacy school.  Can't afford to live here while in pharmacy school.  I owe more than its worth.  I just signed with a realtor to sell. Just got a call from him telling me that he can't list my house because the lender will not work with me because I am up to date.  Is this true?  Are they working with people who are up to date and not behind?

 

Thanks

Tim

Brandon, fl

 

Jun 17, 2009 12:02 PM #103
Rainer
32,233
Sidney Jimenez
Keller Williams - Miramar, FL
CDPE, Short Sale Expert, 954-665-9449,

TIM,

I'm sure Richard will give you a very good response to your question. But as a Realtor I wanted to give you a hands on answer.

The short answer is "yes," lender will work with homeowners on Short Sales when they are current. The caveat to that is that the person will need to demonstrate a current or quickly upcoming Hardship. A hardship doesn't necessarily mean a person is destitute and has absolutely no money. A Hardship, for our purposes, comes with a somewhat vague definition. For example, someone that is current on their mortgage but is being relocated from their city by their employment, or a person that has just inherited a property...can and do qualify for Hardships.

In your case, is the pharmacy school in your area? Are going to that school to gain future employment or just to augment your current income? You will need to show the lender that you will not be able to make future payments and the sale of your home is a necessary act. The challenges you might encounter is if you have enough income currently to pay your mortgage but want to use that money to enhance your position. The lender might not consider that a Hardship, to them it is a upgrade that might not be necessary in their mind.

This is where Richard might be able to help you. Can a lender deny you a Hardship in which you are trying to better your future. In a sense, a relocation because of employment is just about the same thing, to me. I would take this listing, although we would have sit down and look at all the numbers to give you a full picture of what else might in store for you as far as future consequences and possible requests by the lender to pony up some cash, if they feel you have to spare.

Jun 18, 2009 03:43 AM #104
Rainmaker
254,644
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Tim - I just wrote an extensive article on this subject!  See it at: SHOULD I PAY MY MORTGAGE? SHOULD I STOP PAYING MY MORTGAGE?

Jun 25, 2009 10:12 PM #105
Anonymous
Catherine Coy

I posed the following question to an underwriter at one of the ten largest national banks.

<!--StartFragment-->[quote] We are now experiencing consumers seeking loans when only a year or so ago they sold their homes through short sale.  As you know, Fannie Mae issued new guidelines in June 2008 regarding seasoning of preforeclosure sales.

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf

Pertinent portion:

Establishing a new policy for preforeclosure sales.  A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action.

However, Fannie Mae attempted to clarify the new guideline in Announcement 08-16 (FAQ) dated August 13, 2008.

Pertinent portion:

Q7: If a borrower has completed a short sale and was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?

A:  If the borrower is purchasing a new property and the previous mortgage history complies with our excessive prior mortgage delinquency policy and does not have one or more 60, 90, 120 or 150-day delinquencies reported within the 12 months prior to the credit report date, the loan is eligible for delivery to Fannie Mae, provided the lender or servicer [that] completed the short sale has not entered into any agreement that obligates the borrower to repay any amounts associated with the short sale, including a deficiency judgment.

In brief:

Short sale => never delinquent => no agreement to repay => no seasoning
Short sale => never delinquent => agreement to repay => two years seasoning

My questions are:

  1. Does your bank interpret the above to mean that if the borrower was never delinquent on the mortgage of a short sale property, there is no seasoning requirement at all?
  2. If, however, the borrower enters into a repayment agreement for any portion of the loan so shorted, they automatically are prevented from obtaining a new loan for two years?


Perhaps the quoted portion is simply a case of unclear writing; i.e., if you agree to repay the lender some portion of its loss, seasoning is two years.  However, if you agree to repay the lender no portion of its loss, you can get another loan immediately.  This makes no sense.  

Also, Fannie’s clarified policy of August 13, 2008 seems to fly in the face of its own policy against “buy-and-bail” schemes.  That is, a homeowner ought not to be able to get a short sale approved, only to then turn right around and buy another house—sometimes even a model match in the same neighborhood—for a lower price.

It seems we have a case of several policies overlapping and conflicting.  What do you think? [quote]

Here's the underwriter's response--again, diametrically opposed to Fannie's "clarified" guideline.

[quote] The policy we have been working with is if there are no delinquencies, monthly mortgage lates or deficiency, we can make the loan. It may all depend on how the previous shorted mortgage holder reports. If our borrower shorted their previous mortgage and arranged to repay the deficiency through an unsecured note, as long as their payment history is satisfactory and they qualify with the debt, and as long as the credit report does not indicate the deficiency as past due or a collection, we are O.K. [quote]

So to those in this situation, I would say you'll have to see how it plays out when you seek a new loan.  Obviously, the right hand doesn't know what the left hand is doing.  Write to me off-blog for the name of the national lender.

 

 

Jun 25, 2009 10:30 PM #106
Rainmaker
254,644
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Catherine - great information!  please give the confidential portion - rpz99@florida-counsel.com

Jun 26, 2009 02:23 AM #107
Anonymous
Sara

I own a house in Arizona and had to relocate to New Hampshire for a job. I attempted to rent the house out, but was unsuccessful and it was a financial strain to keep both the house in AZ and an apartment in New Hampshire. Since AZs housing market tanked, our house is very much underwater (almost 50% of what we bought it for). I decided after a year of paying of trying to rent it that I was going to short sell. I got a realtor who specialized in short sales and he advised me that since it was a government backed loan, that in order to get the bank (BoA) to agree to a short sale, we would have to start missing payments. Well, it worked, the bank looks like its going to agree to the sale, but I'm wondering how it will affect my credit. Up until then, I'd never been late on any payment for anything, so I have an excellent credit history.

I read in your blog that I may have been advised incorrectly, and I shouldn't have jeopardized my credit score by not paying. I could "afford" to pay my mortgage, but it meant living month to month and not reducing any of my other debt (student loans mostly). The official short sale hasn't yet been signed, but its looking like the bank will agree to it here in the next couple of weeks. Is there anything that I can do to salvage my credit (like pay the missed months on my mortgage - or would that just be a waste of my money). I'm asking my realtor to attempt to negotiate with the bank to have then report me as "paid as agreed", although I doubt they will report "never late"...because I'm pretty sure they've already reported those to the credit agencies.

Any help would be appreciated!

May 19, 2010 03:20 AM #108
Rainmaker
149,948
Janie Coffey
First Coast Sotheby’s International Realty - Ponte Vedra, FL
Uniting Extraordinary Homes w/ Extraordinary Lives

Recently we did a short sale for a seller who had perfect credit (kept paying as well) with BoA.  Because they had good credit, BoA asked them to sign an note for $90K to be paid after the sale of the home (worth $215K).  We were able to get that down to $50K and the seller decided to go through with it and sign the note, but when we asked why they had been asked to sign a note and others have not, they told us it was because they had good credit.  We asked what would have happened had they had bad credit and they told us that the requirement to sign a note would have been waived.  I have read this about BoA specifically by other Realtors as well.  i cannot say that this is company wide as it was only on one sale, but reading that it has happened with others makes me wonder.  Each short sale and seller is different so who knows, but it is something to think about.

May 19, 2010 03:55 AM #109
Rainmaker
254,644
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Janie - 

Good observation. From documents we have received (and were not supposed to have seen), paying your other financial obligations timely (having good credit) IS a factor in the terms offered for a short sale resolution.  This is not specific to BoA, but widely used.

May 23, 2010 03:44 PM #110
Rainmaker
254,644
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Sara -

FANNIE Mae and Freddy Mac owned loans do indeed require you to be 39 days late for a short sale to be approved.

Expecting a credit reporter (the lender or servicer) to report your history incorrectly or inaccurately is really too much to expect.

I don't think there is much to re-negotiate.

Good luck and tell us how it works out.

May 23, 2010 03:49 PM #111
Rainer
34,552
Speed Equity® Mortgage Acceleration System
Speed Equity® - Olympia, WA
We help your clients Own Their Homes Years Sooner

I'm glad I joined AR. It is now 11:32 pm and I've spent close to 8 hours today studying your information. FANTASTIC. You are a credit to this community and I hope you get a lot of business from it.

If you were in WA State I would send you more referrals than you could ever deal with. Thanks again for your time and effort.

Aug 08, 2010 07:34 PM #112
Rainmaker
254,644
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Harj -

Maybe I should move!

Aug 11, 2010 01:51 AM #113
Anonymous
Karen Maher

Can they attempt to collect the amount of money that the bank lost on the short sell.  If I short sell can they sell this as bad debt and come after for it.  Especially if it is a stratgic foreclosure.

Oct 14, 2010 03:33 AM #114
Rainmaker
254,644
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Karen -  The shortfall is collectable unless the indebtedness has been released by the entity holding the debt.  Whether it is or is not a strategic default is not the issue - although some lenders (including Fannie Mae) have said they will in foreclosure situtations definitely pursue strategic defaulters.

Oct 14, 2010 07:59 AM #115
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