Credit Reporting After Short Sale

Many people ask whether a short sale is any better for their credit than a foreclosure, and from a strictly credit scoring standpoint, the answer is probably no. The main benefit to choosing a short sale lies in the fact that you can qualify for conventional financing several years sooner with a short sale than a foreclosure.

Per Fannie Mae Guidelines, a consumer can qualify for conventional financing as soon as 2 years after a short sale. In contrast, a foreclosure will eliminate that possibility for a minimum of 7 years (absent extenuating circumstances). Making sure that your short sale is being reported correctly, both in substance and as to timing, can make a huge difference to your ability to reenter the home ownership market.

There is presently no code that lenders and credit bureaus use to denote a short sale on a particular mortgage account. However, per the industry’s standardized reporting format, the original mortgage holder should report the account with a “current or paid as agreed” code in the manner of payment field, and denote the short sale in the “Remarks” section as “settled for less than full amount” or some similar notation. Overwhelmingly, lenders are NOT doing this.

Of greater concern is the fact that in underwriting potential mortgage applications, Fannie Mae identifies mortgage accounts that are reported with a “collection or charged off” code as foreclosures. In other words, if your original mortgage lender is reporting your short sale as “settled, charged off” in the manner of payment field, Fannie Mae will wrongly identify that language as a foreclosure. Even though this is not true, your current mortgage application will get an automatic “Refer with Caution” (which means DENIED) recommendation unless 7 years has passed since that notation was made.

Many mortgage brokers are feverishly working with consumers trying to get around this glitch. Even Fannie Mae has stepped forward and admitted there has been a significant problem with short sales being identified as foreclosures and, as of mid-November, Fannie Mae will allow loan originators to overwrite Fannie Mae’s foreclosure identification in circumstances where the consumer can prove there was no foreclosure. However, this is a “band-aid” fix at best because short sales are continuing to be reported incorrectly and Fannie Mae will go on wrongly identifying them as foreclosures.

If you have been denied conventional financing because your short sale is wrongly being identified as a foreclosure, you may have a legal cause of action to recover the damages you have suffered as a result. Contact us today for a FREE TELEPHONE CONSULTATION.

It is possible that the lender who agreed to your short sale has mistakenly reported it as a foreclosure, or has improperly coded the short sale so an actual foreclosure is being reported to the credit bureaus.

If the word FORECLOSURE is showing up on your actual credit report, you need to dispute that information as false with each of the credit bureaus (TransUnion, Equifax and/or Experian) that is showing that false information.

Click here for more information on lodging disputes with the credit bureaus.

If foreclosure proceedings were started against you, there is little you will be able to do to remove that notation from your credit report. You will most likely need to wait the 7 years required by Fannie Mae before qualifying for conventional financing.

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