Pre-Foreclosure vs. Short Sale - Does it even matter?

By
Real Estate Mortgage Broker with VanDyk Mortgage

Is there a difference between pre-foreclosure sales and short sales? Well, Fannie Mae seems to think so, see https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/pdf/0816faqs.pdf.

Pre-foreclosure sales are where the borrower has been delinquent on payments and the lender accepts a lesser amount than owed to settle the loan and to avoid a foreclosure. This is treated differently than a true short sale, where although the lender takes a lesser amount than what is owed to settle the loan, the borrower may have had one or two 30 day late on their credit report.

Fannie Mae says that if a) a borrower has completed a short sale, b) their mortgage payment history complies with their excessive mortgage delinquency policy, c) they have never been more than 30 days late, and d) there are no deficiency judgments, then Fannie Mae has agreed to insure these loans if a lender will give them a loan.

In theory that sounds great, but does it even matter?  Most lenders will not even consider a short sale with a borrower until they are late on payments.  In addition, after speaking to multiple wholesale lenders, most said that for now, they are avoiding ANY borrowers who have a short sale on their credit, even if there were no late payments or deficiency judgments!  A couple of lenders said it would be a case-by-case basis, but were very leery at best.

My feeling is that it is too early in this mess to tell how everything will be handled, so lenders are being overly cautious for now.  Common sense is telling me that Fannie Mae wants to work with those who have lived up to their credit obligations.  It's not just the speculators that are upside down, it is regular homeowners who bought in the last couple of years as well. 

Now, Fannie Mae also states that it is not their policy to direct lenders on how to report on a borrower's mortgage credit history.  To me, logic would therefore dictate that whether or not a lender reports a short sale on a credit report is a negotiable item during a short sale.  I've been sort of taking a straw poll here, and want to know what you guys out there think. I'd really like to hear what your take on this policy is or what you think it should be! Looking forward to hearing from you.

  

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Location:
Florida
Groups:
Mortgage Bankers
Tags:
fannie mae
short sales
credit history
preforeclosure

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Anonymous #6
Anonymous
Steven

As an owner of a National Loss Mitigation Co. I am seeing more lenders/servicers/PMI companies warding off potential defaults by accepting Short Sales even if the customer is not in default. The market is dictating that lenders accept these lower offers to get their portfolios cleaned out and just get cash in the door fast! 

September 28, 2008 10:17 AM
Anonymous #7
Anonymous
Jack Martin

We recently completed a short sale transaction on our home in Maryland (Extended DC metro). We were in the home under 1 year and the value dropped 20% from what we bought.  Due to extenuating circumstances, we were forced to return to West PA and sell our home. The short sale process went without a hitch, and we were able to qualify for the HUD program that reimbursed the mortgager for the margin on the sale with gov't funds. We were unable to get the answer as to how the transaction would effect our credit. Upon pulling our credit reports, we see that we have no late payments recorded on the mortgage (we were 60 days behind, but they lender removed when the transaction finalized) and the balance is zero. My credit score qualifies for FHA and a mortgage broker passed us through the FHA automated system and we were approved. However, underwriters in our region are not willing to accept an application that has a mortgage that says " Legally paid in full for less than full balance". We are being told by each lender that they can't lend to us because FHA treats Short Sales like Foreclosures. I've done much research and even spoke directly to FHA to know that the lender is likely hiding behind that statement. They don't want to extend the risk, but FHA has no such guidelines on Short Sales. Is there any advice out there for me?

July 13, 2009 09:41 PM
Rainmaker
67,156
Brian P. Forrester
VanDyk Mortgage

@Jack - Unfortunately, you must find a lender who will lend you money with a short sale on your credit.  The rub there is I do now know of one who will.  I have seen lenders shy away from a loan where a borrower was never late on payments on their current home, they had a contract on their current home to sell it where it would have sold as a short sale and they wanted to buy a new home.  We could not get a lender to give them a loan as when their current home sold, it would have been a short sale.  In the end, lenders will put their own standards on top of HUD(FHA), Fannie Mae, and Freddie Mac guidelines.  So even though FHA will allow for something (say a specific credit score or a debt to income ratio), it does not mean a lender has to adhere it.  I did have a underwriter say to me the other day that she would consider something like your situation, but it was one year removed and even then, she said it would depend on a host of factors.

July 16, 2009 07:46 AM
Anonymous #9
Anonymous
Daniel

I am in process of short selling a my primary residence, never been late on any payments, doing a short sale because of job move. I was told by a bank and that i may qualify for a new loan/house because i was never late despite doing a short sale. Moral of story? Don't be late and miss payments on your current property, you still have a chance!

March 20, 2010 02:44 PM
Rainmaker
67,156
Brian P. Forrester
VanDyk Mortgage

@Daniel - absolutely!  I know of a couple of lender who as of today will lend to someone who has had a shortsale in the last two years under very specific circumstances, the main one being you cannot have been late on your mortgage.

March 21, 2010 08:36 PM
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Brian P. Forrester

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