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Short Sales -- Same Thing As A Foreclosure? Main Boise Home Loans
SCENARIO -- You are upside down in your current home's mortgage, and are considering trying to "short sell" your home to avoid foreclosure. Think again!

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Dear BuildingCredibility.com reader:

If you have been following the housing market, you are probably aware that housing prices and values across the nation are dropping due to the wave of foreclosures the market is experiencing. In fact, Fannie Mae is now "officially" recognizing the Ada/Canyon county areas as declining markets. If your area/subdivision has experienced two or three of these types of distressed sales, chances are that your home's value has fallen substantially if those distressed sales were comparable to your home.

Many people caught in an "upside down mortgage" are being counseled to, and are considering, selling their home short of what they owe...commonly called a short sale. In order for this to happen, the seller's mortgage lender must agree to allow the home to be sold for the agreed upon price between seller and buyer...at a price that is LESS than what is owed on the mortgage.

The problem that is happening is the misconception that "short selling" your home will not hurt your credit. That may be true if you just look at your credit score, but not necessarily true when you talk mortgage qualification.

The potential problem lies within how the mortgage lender will report your "short sale" to the credit bureaus. As a seller, you may not have ever been late on your mortgage payment, and you may have had a lender that gave the green light to allowing you to sell your home short of what you owe. After your home's short sale closed, your tradeline on your credit report shows a $0 balance and account closed. However, many lenders are adding a note line to the closed tradeline that reads something like this...

"Mortgage closed short of balance due"

OR

"Short sale approved by lender"

While those lines seem harmless enough, you have no control over how your next lender will treat that short sale. More and more, lenders are looking at short sales in the same light as foreclosures. Even though the circumstances are very different, the core of the issue is the same...you have a homeowner who is unable or unwilling to meet their mortgage obligations under the promissory note they signed.

Mortgage credit is the only type of credit in this country where you have to have an established, good credit history in order to qualify. Need a credit card...any 18 year old college freshman can get one with ABSOLUTELY NO CREDIT HISTORY. Automobile loan...ever heard the advertisements stating, "Bad credit, no credit, NO PROBLEM!" It's not the same with mortgage credit. New conforming loan guidelines state that a foreclosure must be five years seasoned (four years with extenuating circumstances) before you can qualify for a new conforming mortgage. By selling your home short of what you owe, you will run the risk of having a future potential mortgage lender cast your credit report in the same light as that of a foreclosure. Make sure that is a chance you are willing to take, because five years is a LONG TIME!

If you have additional questions about mortgage loan guidelines, or are interested in talking about a mortgage for your home, feel free to call or email me at (208) 880-0316 and eric@ericsloans.com. You can also visit my website at http://www.ericsloans.com.

Warm Regards,

Eric Leigh, Mortgage Loan Officer
2965 E. Tarpon Drive, Ste. 150
Meridian, ID 83642
(208) 880-0316
http://www.ericsloans.com
eric@ericsloans.com
 
Posted by Eric Leigh at 6/10/2008 3:05:00 PM
Comments (7)
Re:Short Sales -- Same Thing As A Foreclosure?
Eric, my husband and I work with a lot of short sales. We always suggest that the homeowner consult an attorney and a CPA before we move forward. Also, we suggest they talk to a mortgage broker or two if they have any intentions of purchasing another home in the future. I've had many lenders say different things. Some say that it hurts your credit as much as a foreclosure, but the clean up time is quicker (around three years as opposed to 5 or 7 with a foreclosure). Some have said that in certain circumstances they may be able to get a loan quicker than that. Some say it does hurt your credit, but not as much as a foreclosure and you can raise your credit score quicker. Any insight on these different answers? Also, the choice of Short Sale or Foreclosure is different from person to person, but one thing to consider in Idaho is that we are a deficiency state and if the bank doesn't get what they want selling it at foreclosure the legally can come after the owner for the remainder. Whether they do or not is anybody's guess. But, having the lender/investor charging it off before foreclosure is a certain way to make sure that happens. Every situation is different. That's why a team of people need to all look at the situation, way the options and make a decision based on that, and that's why we also involve the appropriate attorneys and CPA's as well.
Posted by on 6/10/2008 10:10 AM
Re:Short Sales -- Same Thing As A Foreclosure?
P.S. When I turned 18 I couldn't get a credit card no matter what I did. I'd had a checking account with perfect history with my bank for 6 years. I had to have my mom as a co-signer on my first CC to start building credit........
Posted by on 6/10/2008 10:12 AM
Re:Short Sales -- Same Thing As A Foreclosure?
Another thing to keep in mind on acquiring a property via short sale is the time it takes to negotiate these through. I have been involved in some that after two months, the buyer has pulled their offer due to lack of response and communication from the lender. Investors can wait it out easier than a buyer who is hoping to get their kids registered for school or has to have a fixed date to plan.
Posted by on 6/10/2008 6:02 PM
Re:Short Sales -- Same Thing As A Foreclosure?
Kasey,

As to comment #2...very interesting that you didn't get a credit card without a co-signer. There are a number of credit card companies that I have referred clients who need to build credit that have only been able to qualify $200 and $300 credit limits, but still were approved. I'd like to speak with you about what bank or creditor you were applying at...seems like you should have been able to get something somewhere with your sterlinig bank background.

As to comment #1...your team is so wise to refer potential short sellers to a CPA and lawyer. There is so much more to it than simply geting out of an upside down mortgage situation and moving on...the decision can haunt you and your credit. I applaud you and your team for coundeling clients into taking those important steps.

The only thing that really hurts your credit score in the short sale process is the missed/late mortgage payments. But, after two years, these missed/late payments will stop hurting your score. I could see a person's credit SCORE easily recovering after two years. However, your ability to qualify for a mortgage is more than a credit score...that's where the short sale can hurt you...it all depends on how the lender reports to the bureaus, and how your next prospective mortgage lender will look at the short sale.

Guidelines state that a foreclosure must be out five years, but many lenders will just follow the Fannie or Freddie findings on an automated loan approval. By that I mean, you could have an Approve/Eligible loan with Fannie, and a foreclosure only out 3.5 years. In that situaiton, even though guidelines state that the foreclosure is not properly seasoned, the lender will still approve the loan because it made an automated approval with Fannie. The same loan would never survive a manual underwriting approval however.

To make a long reply short, if you can get an automated underwriting approval, your chances are very good that the loan can get done. Each individual will be looked at differently and on a case by case basis, so really, there is no 100% hard guideline...just approvals and declines.

Thanks for your blogs Kasey!

Regards,

Eric
Posted by Eric Leigh on 6/10/2008 9:21 PM
Re:Short Sales -- Same Thing As A Foreclosure?
Jim,

Great and important point about the time involved on short sale approvals. I have a client who is in month three now...but they fortunately do not have kids and school registrations to worry about. If you have the time and patience, short sales may bring about a great value...but as you said...be prepared to be patient! Great reply Jim...thank you!

Eric
Posted by Eric Leigh on 6/10/2008 9:23 PM
Re:Short Sales -- Same Thing As A Foreclosure?
Eric,

Thank you for sharing some valuable information regarding "short sales". As a lender, this is important to know especially given the current residential real estate market. This is valuable information if I have clients considering this option both as a home owner and investor.

Cassie Fontaine
Posted by on 6/11/2008 11:17 AM
Re:Short Sales -- Same Thing As A Foreclosure?
Eric,
I banked at First Interstate which had recently been absorbed by Wells Fargo at that time. I had even been an employee as a teller for the year previous. I don't recall trying to get a card from anywhere else, so maybe I could have if I would have ventured away from my bank. It wasn't that big of a deal, and eventually I got my own and now I can't get the dang CC companies to stop sending me offers or raising my limit without me asking them to....we are certainly a country of credit.
Posted by on 6/12/2008 2:01 PM
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