From New Jersey to Hawaii, credit reporting agencies have mistakenly reported the short sales that homeowners negotiated with financial institutions as foreclosures. The Federal Trade Commission and the Consumer Financial Protection Bureau are looking into the issue. However, the current credit reporting system doesn’t differentiate between the two, even though there are significant differences between them. This is especially when considering credit repair.
In a short sale, the financial institution agrees to sell the home at a predetermined price. Any remaining loan on the part of the borrower is usually completely forgiven. The financial institution remains involved during the process. On the other hand, in a foreclosure, the financial institution essentially eats all the losses. The homeowner quits paying the mortgage and stays there until they are forced out through an eviction. The owner usually doesn’t work with the bank at all.
Both a foreclosure and a short sale show up as a serious, negative reflection on a consumer’s credit report. Usually, a lender takes a more significant financial hit in a foreclosure than in a short sale. When the bank repossesses a home, expenses can include cleaning and repairs, taxes, insurance and other delays in readying the home for resale.
The underwriters of most mortgages in the country are Fannie Mae, Freddie Mac and the Federal Housing Administration. They look at a person’s credit to see if they had a previous foreclosure or short sale and have coding to differentiate between the two. For example, Fannie Mae allows someone who has a prior short sale that is only two years old to qualify for a new loan. However, for a foreclosure, the consumer must wait seven years.
When a consumer is looking for debt relief, they could consider bankruptcy. A bankruptcy lawyer might be able to help clients with the process of debt reduction and might be able to stop foreclosure in some cases.
Source: Washington Post, “Short sales may be treated like foreclosures by credit-reporting agencies“, Kenneth R. Harney, May 16, 2013