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.