How a Short Sale Will Ruin Your Credit - Short Sales vs. Foreclosures and Credit Facts

Sounds like you have the drill down, Elizabeth.  Good for you.

Elizabeth, I don't seem to be getting the hang of (1) fonts (2) spacing and (3) editing.  Is there a tutorial on this site on how to post so that huge spaces don't occur between paragraphs?

Wow!  This was a great post!  I read every single comment but am still not sure what the facts are.  Before reading it, I was told and had read that it is better than a foreclosure and it was possible to secure another mortage in 2 years.  I also read that if someone had excellent credit, 750 or higher, before the short sale and this was the only "bad" thing, they would be in much better shape.  I am meeting with a couple this week who are behind on their mortgage payments and we will be talking short sale.  It sounds like all the circumstances involved need to be considered.  Is the mortgage the only thing they are behind on, or is it everything else as well?

Susan, the rules have changed considerably since this thread began.  Please see Elizabeth's blog entry regarding the new rules that apply to short selling homeowners based on this Fannie Mae Announcement:

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

Basically, the following actions are considered "foreclosure" by Fannie Mae:

Short sale

Foreclosure

Deed-in-lieu

Lates over 120 days

Forbearance agreement

Notice of Default

Previously, they ALL required that four years pass between the conclusion of the event and a new loan.  A few months ago, Fannie Mae increased the "seasoning" period to five years.

Then, day before yesterday, per the link above, Fannie Mae plucked "short sale" out of the list and said:

Establishing a new policy for preforeclosure sales [short sale].  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.  

In addition, the borrower must show that s/he has re-established credit by attaining a FICO score of 680.  The best way to do this is for the homeowner to PAY ALL HIS/HER OTHER BILLS ON TIME and maintain credit card balances below 50% of credit capacity.

This is good news for the distressed homeowner because it means that, with a bit of patience and sound debt management, s/he can be back in the home-buying game in two years.  For this reason, short sale is eminently better for the distressed homeowner, assuming that s/he wants to purchase a home again in the relatively near future.

Regardless of the perceptions of those not in the mortgage business, and possibly based on what they hope Fannie/Freddie's position ought to be, Fannie/Freddie's guidelines govern, as explained in the Announcement posted.

Catherine, thank you so much - at least now I can explain this to my client with some facts under my belt - terrific post!

You're welcome!  I think we're all on the same page now, thanks to Elizabeth Weintraub's dedication to The Truth--not what people want to hear--so that we're all playing the game properly and profitably.

Thanks, Elizabeth.  Coming from you, that's quite a compliment.  In these challenging times, it's necessary to have more than one quiver in one's arrow. That's why I count among my services (1) loan origination for purchases and refinances; (2) short sale processing and negotiating and (3) loan modification for homeowner-borrowers.

With respect to short sale, this situation is ever-evolving as well.  It's possible to negotiate strongly for steeper discounts when it can be shown that the lender was culpable in some way.  Not that lenders are quaking in their boots, but part of the strategy now is to analyze the homeowner-borrower's closing documents for evidence of sloppy disclosure.  If necessary, one can hire an attorney to review the homeowner-borrower's loan documents.

http://www.cnbc.com/id/25461975 

With respect to loan modification, lenders are approving loan modification only when the homeowner-borrower can prove income.  This puts all those "stated income" homeowner-borrowers--unless they can now go full doc--over a barrel.  These homeowners may as well proceed to short sale.

I forgot to include the link to Fannie Mae's announcement wherein they increased the seasoning period for "foreclosure"--defined by Fannie/Freddie as...

Short sale

Foreclosure

Deed-in-lieu

Lates over 120 days

Forbearance agreement

Notice of Default

... from four years to five years--except for short sale, which is now two years. Here's the announcement; see page 11.

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0808.pdf

(I'm still looking for the specific guideline wherein Fannie and/or Freddie defines "foreclosure."  I haven't found it yet; only references to it.  In lieu of that, here's a lender's product summary wherein "definition of foreclosure" is set forth.  See page 5 under "Credit/Foreclosure."

http://tinyurl.com/4ostvx

(Dang, Elizabeth, I can't get the hang of font/spacing uniformity on this blog!  Help!  Oh, well, the information is here, even if it isn't pretty.)

This just in...

Investor Report: Fannie Mae and Short Sales 
by Kenneth R. Harney 


Here's some good news for investors interested in "short sales" -- that's where home owners who can't afford their mortgages sell their houses at substantial discounts, often below what they owe on the loan. 

Fannie Mae, the single biggest player in the American mortgage market, plans to crank up the pace of short sales on properties in its bulging portfolio. Fannie intends to "streamline" procedures to enable pre-foreclosure sales to speed through what is currently an extended, and often complicated, process.  Fannie says it plans to "pre-approve" certain short sales--a major change from current practices--and wants to provide higher commission incentives to realty agents who can connect sellers with qualified buyers. 

Fannie Mae thus joins its rival, Freddie Mac, who months ago began emphasizing faster, more efficient short sales - to great success. 

Freddie Mac's program, which allows some loan servicers to submit short sale packages with minimal documentation, doubled the number of completed short sales for the company in the last quarter, according to a report in the American Banker, a financial trade journal. 

Investors like Freddie and Fannie want to speed up the pace of short sales because -- to put it bluntly -- it saves them a ton of money. They avoid the crushing costs of foreclosures. Plus, they generally get a much higher payoff percentage of what they're owed. 

Despite complications -- ranging from uncooperative banks holding second liens on properties to title, financing and inspection problems -- short sales are booming. Some industry estimates suggest that so far this year, one of every five home sales in the U.S. has been a pre-foreclosure transaction of one sort or another. 

The opportunities for small investors and realty brokers here are huge. But investors need to have patience and the ability to handle what are sometimes contentious negotiations. 

For example, Nancy Gusman, a Maryland real estate attorney, told Realty Times that "everybody in these deals is after every last dollar they can negotiate, and sometimes they hold out forever." 

The mortgage holder is looking for the highest possible current appraisal to justify the highest possible payoff price; the short-sale buyer is looking for the lowest possible appraisal to justify a bargain-basement price for the house; and of course, listing realty agents want a fair commission for their work in putting the transaction together. 

The bottom line here for investors and agents: Fannie Mae's forthcoming policy emphasizes getting short sales DONE -- faster. That, in turn, should mean more opportunities for everybody -- investors, first-time home buyers, and brokers alike. 

Elizabeth, that article is dated April 2008, yet the text says, "...Fannie Mae's forthcoming policy emphasizes getting short sales done faster."  I haven't seen a policy that fulfills the definition of "forthcoming," so maybe I'll write to Kenneth Harney and ask him what he means.

sorry - I wasn't logged in.

Wow! congrats on the opportunity you have. I say "do it!" You will find a way to make it relevant, up to date, and informative. You have what it takes, so go for it! And, there is alot more starting to happen in the short sale arena.

besides; I've read some pretty bad books in my day. Anyone with your knowledge and resources should be writing books. How about an AR collaborative? There are lots of brilliant pro's in the Rain who could help. I would love to read and hand out a book like that.

good luck!