How a Short Sale Will Ruin Your Credit - Short Sales vs. Foreclosures and Credit Facts

By
Real Estate Agent with Lyon Real Estate BRE #00697006

will a short sale ruin creditSeveral years ago, borrowers who ended up in a short sale situation fared a bit better than those who let the bank take back the home in foreclosure. That's not true anymore, because short sales affect credit the same as a foreclosure. At least for the time being.

However, while up to June 25th, it used to be a five-year wait per Fannie Mae guidelines, the good news is Fannie Mae has changed its guidelines, so sellers can buy a new home in two years!!!

Agents who tell their sellers that a short sale will not ruin their credit or that their credit report will take a smaller hit are misinformed. I won't go so far as to say they are lying, they just don't know any better. As a real estate licensee, agents are supposed to know better and, they are not supposed to give legal advice.

But at least now agents have a real reason to say that a short sale is better. It's better because a short-sale seller can buy another home in two years, providing credit has not been further impaired during that 24-month period.

If you are considering the credit implications of a short sale, get professional advice from a real estate lawyer.

Read more about Will a Short Sale Ruin My Credit?

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Elizabeth Weintraub is an author, home buying expert for About.com, a Land Park resident, and a veteran real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento, as well as tract homes in Elk Grove, Natomas, Roseville and Lincoln. Weintraub is also a Sacramento Short Sale agent who lists and successfully sells short sales throughout the four-county Sacramento area with an emphasis on Elk Grove. Call Elizabeth Weintraub at 916.233.6759. Put 40 years of real estate experience to work for you. Broker-Associate at Lyon Real Estate. BRE License # 00697006.

The Short Sale Savior, by Elizabeth Weintraub, available with free shipping.

Photo: Unless otherwise noted in this blog, the photo is copyrighted by Big Stock Photo and used with permission.The views expressed herein are Weintraub's personal views and do not reflect the views of Lyon Real Estate. Disclaimer: If this post contains a listing, information is deemed reliable as of the date it was written. After that date, the listing may be sold, listed by another brokerage, canceled, pending or taken temporarily off the market, and the price could change without notice; it could blow up, explode or vanish. To find out the present status of any listing, please go to elizabethweintraub.com.

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Show All Comments
Rainmaker
1,223,966
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Thanks for sharing your point of view, Erin. I appreciate the time you took to follow up. That was thoughtful of you.

Hi Catherine: Is it possible that Erin's lending source is a subprime lender?

Hi Carolyn: Doing short sales for sellers often eliminates the nagging conscience and it makes them feel proactive. Yikes, I hate that word proactive.

elizabeth weintraub sacramento real estate agent

Jun 24, 2008 02:15 PM #32
Rainmaker
1,223,966
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Hi Catherine: You're telling me it's time consuming. That's why I partner my short-sale negotiations with an agent / lawyer in my office. She's very tough, disciplined and tenacious, spending most of her time hammering banks, which frees me up to do other things that I actually enjoy while still obtaining excellent results for my clients.

elizabeth weintraub sacramento real estate agent

Jun 25, 2008 08:31 AM #33
Anonymous
Anonymous
Anonymous

Sounds like you have the drill down, Elizabeth.  Good for you.

Jun 25, 2008 05:41 PM #34
Rainmaker
1,223,966
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Thanks, Catherine. Hey! I see you are linked now. Good job!!! But let me tell you, my fingers are getting tired of running that scrolly wheel just to get to the bottom of this post. LOL.

I think I shall take a break and play a few rounds of Bejeweled . . .

elizabeth weintraub sacramento real estate agent

Jun 25, 2008 08:26 PM #35
Anonymous
Anonymous
Anonymous

Elizabeth, I don't seem to be getting the hang of (1) fonts (2) spacing and (3) editing.  Is there a tutorial on this site on how to post so that huge spaces don't occur between paragraphs?

Jun 28, 2008 04:27 AM #36
Rainer
70,887
Susan McQuaide
Keller Williams - Simpsonville, SC

Wow!  This was a great post!  I read every single comment but am still not sure what the facts are.  Before reading it, I was told and had read that it is better than a foreclosure and it was possible to secure another mortage in 2 years.  I also read that if someone had excellent credit, 750 or higher, before the short sale and this was the only "bad" thing, they would be in much better shape.  I am meeting with a couple this week who are behind on their mortgage payments and we will be talking short sale.  It sounds like all the circumstances involved need to be considered.  Is the mortgage the only thing they are behind on, or is it everything else as well?

Jun 28, 2008 06:49 AM #37
Anonymous
Anonymous
Anonymous

Susan, the rules have changed considerably since this thread began.  Please see Elizabeth's blog entry regarding the new rules that apply to short selling homeowners based on this Fannie Mae Announcement:

 

 

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf

 

 

Basically, the following actions are considered "foreclosure" by Fannie Mae:

 

Short sale

Foreclosure

Deed-in-lieu

Lates over 120 days

Forbearance agreement

Notice of Default

 

Previously, they ALL required that four years pass between the conclusion of the event and a new loan.  A few months ago, Fannie Mae increased the "seasoning" period to five years.

 

Then, day before yesterday, per the link above, Fannie Mae plucked "short sale" out of the list and said:

 

 

Establishing a new policy for preforeclosure sales [short sale].  A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action.  

 

 

In addition, the borrower must show that s/he has re-established credit by attaining a FICO score of 680.  The best way to do this is for the homeowner to PAY ALL HIS/HER OTHER BILLS ON TIME and maintain credit card balances below 50% of credit capacity.

 

This is good news for the distressed homeowner because it means that, with a bit of patience and sound debt management, s/he can be back in the home-buying game in two years.  For this reason, short sale is eminently better for the distressed homeowner, assuming that s/he wants to purchase a home again in the relatively near future.

 

Regardless of the perceptions of those not in the mortgage business, and possibly based on what they hope Fannie/Freddie's position ought to be, Fannie/Freddie's guidelines govern, as explained in the Announcement posted.

 

Jun 28, 2008 07:37 AM #38
Rainer
70,887
Susan McQuaide
Keller Williams - Simpsonville, SC

Catherine, thank you so much - at least now I can explain this to my client with some facts under my belt - terrific post!

Jun 28, 2008 03:37 PM #39
Anonymous
Anonymous
Anonymous

You're welcome!  I think we're all on the same page now, thanks to Elizabeth Weintraub's dedication to The Truth--not what people want to hear--so that we're all playing the game properly and profitably.

 

 

Jul 02, 2008 06:06 PM #40
Rainmaker
1,223,966
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Hi Susan: Isn't Catherine Coy great? She's one of the smartest and on-the-ball mortgage brokers I could recommend.

elizabeth weintraub sacramento real estate agent

Jul 02, 2008 09:39 PM #41
Anonymous
Anonymous
Anonymous

Thanks, Elizabeth.  Coming from you, that's quite a compliment.  In these challenging times, it's necessary to have more than one quiver in one's arrow. That's why I count among my services (1) loan origination for purchases and refinances; (2) short sale processing and negotiating and (3) loan modification for homeowner-borrowers.

With respect to short sale, this situation is ever-evolving as well.  It's possible to negotiate strongly for steeper discounts when it can be shown that the lender was culpable in some way.  Not that lenders are quaking in their boots, but part of the strategy now is to analyze the homeowner-borrower's closing documents for evidence of sloppy disclosure.  If necessary, one can hire an attorney to review the homeowner-borrower's loan documents.

http://www.cnbc.com/id/25461975 

With respect to loan modification, lenders are approving loan modification only when the homeowner-borrower can prove income.  This puts all those "stated income" homeowner-borrowers--unless they can now go full doc--over a barrel.  These homeowners may as well proceed to short sale.

I forgot to include the link to Fannie Mae's announcement wherein they increased the seasoning period for "foreclosure"--defined by Fannie/Freddie as...

Short sale

Foreclosure

Deed-in-lieu

Lates over 120 days

Forbearance agreement

Notice of Default

 

... from four years to five years--except for short sale, which is now two years. Here's the announcement; see page 11.

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0808.pdf

(I'm still looking for the specific guideline wherein Fannie and/or Freddie defines "foreclosure."  I haven't found it yet; only references to it.  In lieu of that, here's a lender's product summary wherein "definition of foreclosure" is set forth.  See page 5 under "Credit/Foreclosure."

http://tinyurl.com/4ostvx

(Dang, Elizabeth, I can't get the hang of font/spacing uniformity on this blog!  Help!  Oh, well, the information is here, even if it isn't pretty.)

 

 

 

 

Jul 02, 2008 11:26 PM #42
Anonymous
Anonymous
Anonymous

This just in...

 

Investor Report: Fannie Mae and Short Sales 
by Kenneth R. Harney 


Here's some good news for investors interested in "short sales" -- that's where home owners who can't afford their mortgages sell their houses at substantial discounts, often below what they owe on the loan. 

Fannie Mae, the single biggest player in the American mortgage market, plans to crank up the pace of short sales on properties in its bulging portfolio. Fannie intends to "streamline" procedures to enable pre-foreclosure sales to speed through what is currently an extended, and often complicated, process.  Fannie says it plans to "pre-approve" certain short sales--a major change from current practices--and wants to provide higher commission incentives to realty agents who can connect sellers with qualified buyers. 

Fannie Mae thus joins its rival, Freddie Mac, who months ago began emphasizing faster, more efficient short sales - to great success. 

Freddie Mac's program, which allows some loan servicers to submit short sale packages with minimal documentation, doubled the number of completed short sales for the company in the last quarter, according to a report in the American Banker, a financial trade journal. 

Investors like Freddie and Fannie want to speed up the pace of short sales because -- to put it bluntly -- it saves them a ton of money. They avoid the crushing costs of foreclosures. Plus, they generally get a much higher payoff percentage of what they're owed. 

Despite complications -- ranging from uncooperative banks holding second liens on properties to title, financing and inspection problems -- short sales are booming. Some industry estimates suggest that so far this year, one of every five home sales in the U.S. has been a pre-foreclosure transaction of one sort or another. 

The opportunities for small investors and realty brokers here are huge. But investors need to have patience and the ability to handle what are sometimes contentious negotiations. 

For example, Nancy Gusman, a Maryland real estate attorney, told Realty Times that "everybody in these deals is after every last dollar they can negotiate, and sometimes they hold out forever." 

The mortgage holder is looking for the highest possible current appraisal to justify the highest possible payoff price; the short-sale buyer is looking for the lowest possible appraisal to justify a bargain-basement price for the house; and of course, listing realty agents want a fair commission for their work in putting the transaction together. 

The bottom line here for investors and agents: Fannie Mae's forthcoming policy emphasizes getting short sales DONE -- faster. That, in turn, should mean more opportunities for everybody -- investors, first-time home buyers, and brokers alike. 

Jul 15, 2008 05:32 PM #43
Rainmaker
1,223,966
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Thanks, Catherine. If I have time this week -- and who knows with the way things are going -- I'm going to try to write an article about this for my About.com site.

elizabeth weintraub sacramento real estate

Jul 16, 2008 09:23 PM #44
Anonymous
Anonymous
Anonymous

Elizabeth, that article is dated April 2008, yet the text says, "...Fannie Mae's forthcoming policy emphasizes getting short sales done faster."  I haven't seen a policy that fulfills the definition of "forthcoming," so maybe I'll write to Kenneth Harney and ask him what he means.

 

Jul 17, 2008 03:39 AM #45
Rainmaker
1,223,966
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Let me know what Harvey says, Catherine. :)

elizabeth weintraub sacramento real estate

Jul 17, 2008 09:36 AM #46
Anonymous
Anonymous
Mike Sanchez

Wow! Thank you all for this subject and thread. It is evident to me that you are all very knowledgable and seeking the truth to best help your clients / the market in general. Not to be overly mushy here... but you all have managed to restore a little hope in the business for me. I was visiting this group to find a place to vent over some of the gross breaches in fiduciary duty / integrity that I have seen and have been trying to help clean up as I work with homeowners in default and facing foreclosure. Having said that, I have been reassured that there are lots of great Agents out there - all of you included.

Catherine - Awesome!

Elizabeth - I have read some of your articles on about.com and occasionally refer clients there. Fantastic!

Last poster - way to go! (starting to sound like my own little love fest!)

everyone else - thank you and we can all learn alot and be encouraged by posters like these!

I know... enough already, right?

Jul 31, 2008 11:25 PM #47
Anonymous
Anonymous
Anonymous

sorry - I wasn't logged in.

Jul 31, 2008 11:28 PM #48
Rainmaker
1,223,966
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Thanks for popping by, Mike. You know, I got a call from a book publisher a few days ago wondering if I want to write a book about short sales. I told him I honestly don't think I have anything else to say on the subject -- I've worn it to smithereens -- but he seems to differ.

I have no idea who wrote the long comment before yours. Because they weren't logged in either.

elizabeth weintraub sacramento land park real estate agent

 

Aug 01, 2008 05:18 PM #49
Anonymous
Anonymous
Anonymous

Wow! congrats on the opportunity you have. I say "do it!" You will find a way to make it relevant, up to date, and informative. You have what it takes, so go for it! And, there is alot more starting to happen in the short sale arena.

besides; I've read some pretty bad books in my day. Anyone with your knowledge and resources should be writing books. How about an AR collaborative? There are lots of brilliant pro's in the Rain who could help. I would love to read and hand out a book like that.

 

good luck!

Aug 02, 2008 01:48 PM #50
Rainmaker
1,223,966
Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Lyon Real Estate - Sacramento, CA
Put 40 years of experience to work for you

Thanks, Mike. I suppose I could write about the experiences of other AR agents as well. So, if I solidify this book deal and decide to do it, I'll let you know.

elizabeth weintraub sacramento land park real estate agent

Aug 02, 2008 05:02 PM #51
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Rainmaker
1,223,966

Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents

Put 40 years of experience to work for you
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