Real Estate Investor · Los Angeles, CA · Member since 2008 · 19 posts · 0 votes
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!
I learned all that i ever wanted to know about short sale vs. foreclosure credit impacts here in this forum from Catherine Coy. Just Google her.
Bottom line, short sale and foreclosure are disaster for your credit. However, Fannie Mae has recently made policy changes that encourage short sales over foreclosure. If you have a short sale, FM will make you wait two years before being eligible for a FM loan. They make you wait 5 before being eligible after a foreclosure.
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.
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.)
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.
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.