The Short Sale Affect on Credit – Fair or Foul?
Short sales are a common expression in the current real estate environment. Although most of us in the industry are familiar with short sale transactions, one aspect of short sales continues to be debated. The most common question is the impact a short sale will have on your credit. There are many opinions to this discussion. Overwhelmingly it is agreed that a short sale will negatively affect your credit. But is the consequence fair or foul?
Traditionally, short sales were associated with borrowers who were delinquent on their mortgage payments. Many lenders would not approve a short sale transaction unless the homeowner was in default of at least 60 days. The late payments dramatically affected the borrower’s credit and jeopardized the homeowner’s credit capabilities for additional borrowing, whether auto loans, credit cards, or mortgages.
However, with generous new guidelines, Fannie Mae and Freddie Mac recently outlined plans to approve short sales for underwater borrowers who are current on their loan payments. This new guideline applies only to borrowers who are experiencing or facing a hardship. With the new guidelines, those borrowers who were underwater but remained current on their mortgage payments will also be penalized with a hit to their FICO. Should the solid mortgage payment history borrowers suffer a penalty the same as the borrowers who didn’t pay their mortgages? Apparently the answer is yes. According to Frederic Huynh, FICO's senior scientist, short sellers are considered heavyweight risks, just as people who have been foreclosed upon, filed for bankruptcy, or had a tax lien or collection account. The scoring system is not developed to recognize or correctly report “on-time mortgage customers” to the credit bureaus. Therefore, the credit reporting models will not be able to distinguish or modify its scoring algorithms, despite the fact that the seller was not delinquent and came to a mutually satisfactory resolution with the lender.
It should be noted that when borrowers elect to short sale rather than impose the lender to foreclose, Fannie & Freddie will reward them with an eligibility to obtain a new mortgage within two years of the closed short sale transaction. In contrast, a foreclosure may prevent a borrower from obtaining a new loan for as long as seven years.
If you are underwater and intend to utilize the Fannie Mae or Freddie Mac short sale program, please be aware of the affect the sale will have on your credit. The lender will review and report each individual case. But most importantly, please note the short sale is a much more desired alternative to foreclosure.
As a licensed Georgia Mortgage Broker, NMLS #169263, and a licensed Georgia Real Estate Broker, I am allowed to negotiate directly with your lender and market your property. My mortgage experience and lender relationships insure you will receive outstanding representation from a knowledgeable professional. I am available for a confidential consultation at your convenience.