Do short sales hurt your credit score?

Question

I have heard different answers and was wondering what you guys had to say?
 Thanks,
  Erik

Dave P. · Answer

How does the FHA new seasoning rule, regarding pre-foreclosure sales, effect FICO scores?

i'm guessing it doesn't impact them at all, but do you think it will lead to a change in the FICO scores for reason code 22?

Catherine Coy · Answer

This is an appropriate thread to provide a link to one of the best guides on how to clean up a credit score that I've ever seen (and I've read ALL the books on the subject).  It's accurate regarding what you're going to confront if you tackle credit repair yourself--which you should because no one can do it better than you can.  This covers everything you need to get the job--if it can be done--done.

http://www.fool.com/seminars/ev/index.htm?sid=0029

Catherine Coy · Answer

Unfortunately, the 4 months delinquency will, in fact, result in Score Factor Code #22, thereby delivering a body blow to the consumer's FICO score.

Here's a list of Score Factor Codes.  As you can see, there aren't very many SFCs that accurately describe a serious delinquency.  That's why we see SFC #22 in first position so frequently.

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

One more thing...at 4 months delinquent, this consumer doesn't qualify for any institutional loan UNLESS:

1.  He's been current for 12 consecutive months;
2.  The reason for the delinquency was either (a) layoff due to reduction in force; (b) medical emergency or (c) death of the primary breadwinner; and
3.  The reason for the delinquency is unlikely to recur.

Then he can get an FHA loan.

(There's no such thing as 4.5 months delinquent; it's either 4 months or 5 months but nothing in between.)

Catherine Coy · Answer

Wow...I've seen at least 1,000 credit reports in my 17 years of originating loans and I've seen plenty of notations of "forbearance agreement" on credit reports, with the resulting notorious Score Factor Code #22 in first position in the hierarchy of weightedness as a result thereof.  It's hard to believe that a forbearance wouldn't affect one's score.  No, I know for a fact that it does--negatively.

I've already explained that a SS is the same as a foreclosure, so I won't repeat that here except to include a link to an actual lender's guidelines so you can see for yourself how the guidelines (inspired by Fannie/Freddie) treat forbearance, SS, FC, etc.

Shhh...don't tell anyone I posted this link; it's 'sposed to be for loan originators only.  (See page 5 under "Credit.")

http://tinyurl.com/4ostvx

Catherine Coy · Answer

Hmmm...I just clicked on it and it opened, but I'll send it to you via PM.

Dave P. · Answer

SCG,

can you post a new link or pm it to me?

it's not working.

dave

Dave P. · Answer

BTW,

How does score factor 22 apply to rate and term REFI's?

Is it the same thing?

Pretend the home owner has an ARM, went through a hardship, fell behind 4.5 months, and then came current. From what you are saying, it sounds like he won't be able to REFI out of the ARM will he?

thoughts?

dave

Catherine Coy · Answer

That's right.  It's a major flaw in the FICO scoring algorithm, in my opinion, and is why I advocate fighting the bureaus tooth and nail.  Dispute!  Dispute!  Dispute!  Deny!  Deny!  Deny!

On the other hand, lenders--if you were to put yourself in their shoes--want one thing and one thing only:  consumers who pay on time.

Catherine Coy · Answer

How can I say with sufficient tenderness what must be said?  The impact of a 90-day late isn't the same as a foreclosure where underwriting guidelines are concerned.  Why?  Because the borrower had the tenacity to pull himself out of a hole before he went NOD.  That's why, in my role as a loan originator (I negotiate short sales, too), I constantly counsel borrowers to do everything they can not to go NOD (120 days late)--if they want to soften the blow to their score and still qualify, without the seasoning requirement, for a future loan.  They're a completely different animal when they're 90 days late as when they're 120 days late.

Still, both events--90 days down and foreclosure--are assigned Score Factor Code #22--"serious delinquency, derogatory public record or collection filed."  Near term, the effect is EXACTLY the same.  They are "weighted" the same.  I can't stress this enough.

Where your understanding is a little bit thin is that over time--about two years--good credit behavior can supplant derogatory credit behavior where one's FICO score is concerned.  But don't forget...there's still a notation of 90-120 days down or "settled for less than owed" [short sale] on one's credit report that must be explained to a subsequent lender.  When the U/W digs a bit, s/he'll know that a forelosure--as defined by Fannie/Freddie--occurred and thus NO LOAN FOR YOU! until 5 years seasoning has passed.

Please note the distinction between "seasoning"--the amount of time that must elapse between the derogatory credit and a new loan--and a healthy FICO score.  A consumer can, by sheer dedication to month-after-month on time payments--raise their credit score to, say, 680 but still have a foreclosure (as defined by Fannie/Freddie) to deal with when they apply for a subsequent loan.  Even if the consumer has achieved a 700 score, they will be prevented from obtaining a loan if the short sale or foreclosure appears on their credit report.

The only way a homeowner can escape the consequences (destroyed FICO score and seasoning) of not performing as they agreed is to bring the difference between what they owe and the sales price to the closing table.  The homeowner earns no points for "saving the lender the trouble of having to foreclose."

If you were in the lender's shoes, you'd see it this way, too.

Dave P. · Answer

That's brutal.

That's even more brutal.

So the model does not differentiate from a deadbeat that ultimately makes things right and a deadbeat that just walks with no remorse? I thought that's what late payment fees and penalties were for.

Don't get me wrong, it's horrible that people make loan commitments and don't live up to them. But I agree with your earlier post, that it's a little sad that after 120 days there doesn't really seem to be much to fight for.