BiggerPockets

This is my first post in this area. I've been asked by a couple of homeowners that I have approached about what happens to their credit. If the homeowner and buyer arrange a sales prices for less than what is owed and the bank agrees, what will be the consequences to their credit? Are there any other risks or negative information for the homeowner/seller? I would appreciate someones help. Thanks!

Fannie Mae announced on June 25, 2008 that seasoning for a short sale is now two years versus five years for foreclosure. Here's the announcement:

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

Here's the pertinent section:

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

Why has Fannie done this? Because short sales are currently net 80-82% of Fair Market Value to Fannie--which is more than Fannie gets from an REO sale, not to mention that by the time the property goes to foreclosure, it's worth far less in most areas of the country and has sometimes been vandalized.

http://www.rebuild.org/news-article/foreclosure-and-stripping-homes/

To ensure that the former homeowner is ready to purchase again in two years, s/he should pay all their other debts on time and use no more than 50% credit capacity on credit cards.

According to the Mortgage Debt Forgiveness Act of 2007, the amount of mortgage deficiency (known as " phantom income" ) will be forgiven if the house is owner occupied. (No break to investors.)

http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html

The derog will be reported to the bureaus as Score Factor Code #22--" serious delinquency, derogatory public record or collection." There is no other " reason code" that lenders can use to characterize the activity of a defaulted mortgage. "Default" occurs when the borrower does not pay as agreed.

http://www.bayhouse.com/FairIsaac-NextGen-risk-factors.shtml

Depending on the consumer's utilization of other debt, the hit to his FICO could be less than 100 points. Here's a post from this forum where the borrower orchestrated his own short sale at OCWEN and Washington Mutual.

http://forums.biggerpockets.com/about17168.html