SHORT Sales = LONG Impact on Credit!

By
Mortgage and Lending NMLS #94045
https://activerain.com/droplet/MKR

QUESTION:  Have you ever proclaimed: "Short Sales have less impact on your credit than a Foreclosure"? This is not exactly true. Because there are so many risk factors involved in credit scoring; a person who lost their home through whatever means is usually in some state of financial distress; so many other factors will play into how much a short sale itself will impact their credit. Short sales - in many cases - have similar effect on your FICO score as a foreclosure. How can this be? Were we mislead? Yes and no.

WHAT MATTERS MOST  to your average person in credit recovery mode after a short sale is HOW IT'S LISTED on their Credit Report.  There is a particular 'code' which the bureaus use to distinguish them. Do you think all of the lender's credit department staff reporting to the Bureaus even know this code? Not likely. So what can you or your short seller do to be sure it's correctly listed?

GETTING THE CORRECT SHORT SALE CODE ON YOUR CREDIT: To be listed correctly as a Short Sale (and NOT a Foreclosure), a specific code is used to distinguish it from a foreclosure. A credit agency colleague alerted me to this fact just today - so I'm not sure exactly what the right code is just yet as I have yet to chase these folks down myself. It's worth calling the Bureaus and finding out the correct code!

POINTS MATTER: The difference in a foreclosure or short sale code on your report could easily mean 20 points or more to your credit score. And as we know one point under 720 can mean the difference in rate, mortgage insurance and loan programs.  

HAPPY EXAMPLE: A recent client with otherwise perfect credit, low balances and good depth of credit, experienced a short sale less than 12 months ago. It was listed correctly on their credit report. They had  missed 3 payments (as advised to qualify for the short sale). Once the lender agreed to short sale, the borrower paid the arrears and kept making payments until the home was sold. This was a financial burden to this person because they had vacated the home - but their strategy worked. As a result this person's credit score is now 740 and they are well on the way to recovery in 24 months. Amazing? 

SHORT SALES LENDING WINDOW: Generally, a short sale will prevent a person from funding another mortgage for between 2 - 10 years depending on the severity and their loan type in context. In the example above, the defaulted borrower could not get a conventional loan for at least 4 years 'with good behavior'. They had defaulted on a conventional loan.

This same person could be on title with a new spouse - assuming the new spouse qualifies on their own - as a non qualifying spouse. (The new spouse must not have been involved in the previous default -i.e., it was not their shared marital home.) Or they could wait another year to apply for an FHA mortgage together. FHA allows 24 months funding after a short sale with strong compensating factors and recovered credit. FHA will not consider the short sale or credit score of the non borrowing spouse, as long as the borrowing spouse can afford the liabilities of both spouses (a relatively new rule) and the ratios and risk factors are acceptable.

SMARTIES BEWARE: The minute you state you walked from your home because it didn't 'pencil' due to lost home value (if you had no other pressure to leave) and your credit report is a series of rolling missed payments - you can bet you will be denied credit for 4-10 years. It may as well be listed as a foreclosure then. You see, lenders take a dim view of folks walking away from their financial obligations.

ANOTHER POINTER: Anyone who has a credit loss with a financial institution including personal bankruptcy needs to be very careful what they forfeit. If you have a consumer loan with ABC Bank and they took a loss of a little as $1,000 on a surrendered RV, Car or other secured credit, you can bet you won't be getting another loan from that lender for a very long time. 10 years to be exact.

Be safe out there!

Post script 12/24/12  Brian and Frank of the National Real Estate Post mentioned this in a recent daily show. They suggested that people get a letter from their bank stating they were awarded a short sale to present as proof for potential credit disputes later. The only problem we see is the ongoing credit hit of the wrong code on your FICO score - and since those codes are not universally known it's something the Bureaus really need to work out. Again time to write your Congress bods: www.congress.org and let them know about this.

Safe Holidays!

Posted by

 

 

SUSAN TEMPLETON IS A LICENSED LOAN ADVISER IN WASHINGTON

NMLS# 94045

                 

 

Interest rates and products are subject to change without notice and may or may not be available at the time of loan commitment or lock-in. Borrowers must qualify at closing for all benefits. Loannetter is a private brand owned and copyrighted by Susan Templeton.

 

 © 2005-2015 susan templeton copyright

 

close

Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Sajy Mathew 12/09/2012 11:44 AM
  2. Joe Jackson 12/10/2012 12:53 AM
Topic:
ActiveRain Community
Location:
Washington Whatcom County
Groups:
Realtors®
All About Mortgages/Mortgage Networking
Puget Sound - WA Real Estate
"Whacked"!!!
Short Sale and Loan Modification Nightmares
Tags:
credit recovery
short sale credit
credit after short sale

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Hi Pete, It particularly concerns me that distressed Selles are not in a position to know whom to trust and it is our duty to be their advocates.

Dec 09, 2012 03:06 PM #13
Ambassador
1,439,216
Richard Iarossi
Coldwell Banker Residential Brokerage - Crofton, MD
Crofton MD Real Estate, Annapolis MD Real Estate

Susan,

As a real estate agent, I never comment on how clients credit can be affected by a short sale. I can make recommendations on other people call, but making those comments myself is out of the scope of my license.

The information you posted is intriguing, and I look forward to hearing more.

Rich

Dec 09, 2012 08:07 PM #14
Rainmaker
459,054
Ron Barnes
Associate Broker at Berkshire Hathaway Home Services Georgia Properties - Jasper, GA
"Most agents claim they're #1 - I THINK YOU'RE #1!

Good post. The point about less than sharp people assigning codes is big. Our lives are often in the control of people who really don't know and don't care about how to get it right. The other points are also very accurate. Banks don't quickly forget getting burned.

Dec 09, 2012 09:15 PM #15
Rainmaker
1,373,397
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Susan, people who thought they out smarted their lender by doing a strategic default will be renting for a long time. Good information!

Dec 09, 2012 09:42 PM #16
Rainmaker
101,176
Rick Phillips
Frankly Realty - Old Town - Alexandria, VA
I care about you and your transaction.

It ought to be for longer :)

Dec 09, 2012 11:10 PM #17
Ambassador
779,562
Doug Rogers
Bayou Properties - Alexandria, LA
Your Alexandria Louisiana Agent

I cringe when I see other local agents advertise. "Save your credit, short sale your home". Hope they have quality E&O insurance...

Dec 09, 2012 11:11 PM #18
Rainmaker
2,446,601
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

What I have seen is that late pays dings worse than a defaults. I also saw where someone went through a foreclosure and came out with a 800 plus credit score. I wondered how could that be? Now, all I see is everyone has a bad credit report which is the norm for this time. Amazing this business of Real Estate. It never fails to teach

Dec 09, 2012 11:58 PM #19
Rainmaker
516,784
Morris Massre
Pembroke Pines, FL
Real Estate Instructor Broward County Florida

Sellers always ask how a short sale is going to impact their credit, but they seldom do anything postive about it afterward, unfortunately. 

Dec 10, 2012 12:39 AM #20
Rainmaker
2,011,515
Joe Jackson
Keller Williams Capital Partners Realty - Columbus, OH
Clintonville and Central Ohio Real Estate Expert

Excellent post thanks for sharing!

Dec 10, 2012 12:51 AM #21
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Rich, you are my favorite kind of Realtor - one who knows the limits of their expertise!

Ron, It's true the data-keepers have been known to get their facts wrong. In fact 70% of credit reports have errors of some kind.

Michael, Unfortunately some strategic defaulters have come in asking for a loan and I had to break this reality to them. What were they thinking?

Rick, I'm sure some banks would agree with you!

Doug, Any Realtor advertising such hype is asking for it!

Richie, It certainly shows when people know how to play the system.

Morris, As you point out, doing something 'after' a short sale is up to the consumer and very few are guided  - I suggest you refer your short sellers to www.hud.gov for post sale counseling. Some lenders offer free plans to get back on track.

You are most welcome, Joe. Thanks for reading!

Dec 10, 2012 01:34 AM #22
Rainmaker
262,318
Kim & Kristine Halverson
Compass - Santa Monica, CA
Sisters, Realtors

Susan, there are some great affordable credit companies that can re-score/adjust the impact of a short sale.  My clients have had it done and the score was close to pre-short sale.  Kristine

Dec 10, 2012 03:03 AM #23
Rainer
88,586
Christopher Campa
LONG & FOSTER REAL ESTATE - Gainesville, VA
Northern VA Realtor

Susan, I agree with Rich.  The more I learn, the more I'm glad its outside the scope of my expertise.  Great teaching post, thank you.

Dec 10, 2012 06:20 AM #24
Rainmaker
778,713
Nancy Frimann
Eagle Ridge Realty/Signature Homes & Estates - Gilroy, CA
California Real Estate Broker

I totally agree with what you are saying, and I think many Realtors have given people wrong information.  There is a risk of a big credit hit when one sells short, and we should not predict what the bank will do when reporting how the sale was handled.  There is a lot of misinformation out there.

Dec 10, 2012 06:36 AM #25
Rainmaker
1,079,379
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Susan, that was the mantra a few years ago, but things keep changing in the short sale/foreclosure world. One thing that still stands is that if you do a short sale, you don't have to answer Yes to questions have you ever had a foreclosure - on credit applications the rest of your life. That's worth something, i think, all credit scores, etc., aside.

Sharon

Dec 10, 2012 01:38 PM #26
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Hi Kim and Kristina, You are correct - some credit restoration firms know what they are doing - however these woods are full of charlatans! There are also great free credit info sources incuding HUD.gov - including my own blog (not to brag) www.netcredit.blogspot.com gleaned from many case histories.

Christopher, Thank you for reiterating Rich's advice of staying within one's own field! ;-) I'm glad you found this helpful.

Hi Nancy, I'm glad you recognize is how much the 'wrong' information could negatively impact credit recovery. Thanks for taking your Seller's issues seriously. They will thank you for years!

Frank and Sharon, Yes--who knew? Take a closer look at the disclosure questions on uniform loan applications now: they ask if you have ever defaulted on any kind of mortgage, bond, loan obligation, guarantee, etc. ...so it's not as simple as a 'foreclosure' per se anymore!

 

Dec 10, 2012 02:35 PM #27
Rainmaker
533,266
Rob Spinosa
Guaranteed Rate, Marin County, CA - San Anselmo, CA
Vice President of Mortgage Lending, Marin County

Great post.  I got a lot out of this information.  Thank you.

Dec 10, 2012 11:52 PM #28
Rainmaker
66,965
Susan Templeton
Bellingham, WA

You're welcome, Rob. Glad to help to a colleague!

Dec 11, 2012 11:18 AM #29
Rainer
63,975
Adriana West
Home Expo Gallery, LLC (Keller Williams) - Roswell, GA

Hello Susan. Thank you for a great article. Keep it up!

Jan 08, 2013 01:05 AM #30
Rainmaker
66,965
Susan Templeton
Bellingham, WA

You are most welcome, Adriana. Thanks for reading.

Jan 08, 2013 09:41 AM #31
Rainmaker
66,965
Susan Templeton
Bellingham, WA

Update 2/2015: Codes matter but content is king:  As a portfolio lender I am aware that different underwriters take different views of a borrower's integrity in context. Any 'bank loss' be it a 'short sale' or 'short refi' (i.e., HARP or HAMP Modification) could mean 5+ years wait, depending on the specific investor guidelines. For some programs, if the loss can be demonstrated as beyond the person's control (well documented medical issues - NOT divorce) and their credit is in good standing then 2 years may be acceptable grace period. It all depends....

Feb 02, 2015 12:32 PM #32
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
66,965

Susan Templeton

Ask me a question
*
*
*
*
Spam prevention

Additional Information