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Credit Reporting Codes for Short Sales ?

Posted on May 21, 2013 at 3:15 PM

In a short sale, the bank approves the sale of the house to a new buyer at a mutually acceptable price. Any unpaid remaining loan balance not covered by the sale proceeds may then be either partially or fully forgiven.

In a foreclosure, the bank is essentially left holding the bag. The owners walk away at some point or live in the property rent-free until they're evicted.

Both transactions are serious, negative credit events for the borrower. After all, the mortgage wasn't fully repaid. But the financial losses generated by a foreclosure typically are more severe for the lender than by a short sale.

The nation's major sources of mortgage financing — Fannie Mae, Freddie Mac and the Federal Housing Administration — all recognize the differences between short sales and foreclosures in their underwriting policies regarding new mortgages. Fannie Mae generally won't approve a new mortgage application by borrowers with a foreclosure on their credit report for up to seven years, but will consider lending to people who were involved in short sales, and who otherwise qualify in terms of recent credit behavior and available down payment, in as little as two years.

The problem is the CRA's don't have a code to input for short sale, so they use the code for foreclosure instead, taking the reestablished buyer out of the market on a average of five additional years.

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