The affect on your credit from foreclosures, short sales and deed-in-lieus

[Moe Bedard]

• Foreclosure or Deed-in-Lieu of Foreclosure
  Both of these solutions affect credit the same. Sellers will take a hit of 250 to 280 points. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 400.
• Short Sale
  The affect of a short sale on a seller's credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 80 to 100 points. This means a short sale with a previous FICO of 680 will see it fall to 580 to 600.

Waiting Period Before Buying Another Home

• Foreclosure or Deed-in-Lieu of Foreclosure
  Steep says a seller who wants to buy another home after foreclosure will end up waiting about 36 months before a lender will offer any kind of interest rate that makes sense.
• Short Sale
  The good news for short sale sellers is the wait is much shorter before buying another home. "They can buy again in about 18 months at a good interest rate," says Steep.

Short Sale / Foreclosure Deficiency Judgments


The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In California, purchase money loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are. Other states have laws regarding personal guarantees, which could also result in a deficiency judgment if the home owner is personally liable for loan repayment.

The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a real estate lawyer.
If you're a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit is the main advantage to doing a short sale. But seek legal and tax advice before making that decision.

Source http://homebuying.about.com/od/4clos...07SScredit.htm

[elpjohnson]

Thanks, Moe for the info!

[hollywood007]

Since when has a deen in lieu been as bad as a forclosure. apples to apples wise?????
not to be rude in anyway. When i was doing loans full time, there were programs that someone could qualify for as long as it didnt say "forclosure"

just curious,
great post by the way Moe

[Moe Bedard]

Because the implications to your credit (negaitve points) is about the same as a full on foreclosure. It's all based on risk and a deed in lieu is considered someone who is risky to loan to. No ifs ands or butts about it.

This is how Fannie Mae looks at it in detail (courtesy of Poppy)

Prior bankruptcy or foreclosure(including deed-in-lieu of foreclosure) Identification of bankruptcies in the credit report:

DU applies the following guidelines to the processing of bankruptcies:

•If a bankruptcy was filed within the 24-month period prior to the credit report date, the loan will receive a Refer W Caution/IV and will be ineligible for delivery to Fannie Mae.

•If the date filed is unknown but it appears that the bankruptcy was discharged within 24 months, then DU will return a Refer recommendation if the loan would have otherwise received an Approve recommendation. The lender must confirm that the bankruptcy was not filed within the most recent 24-month period.

•If a bankruptcy was filed more than 24 months before the credit report date, the lender must confirm that the bankruptcy was discharged at the time of the loan application. (This applies to all recommendations.)


•DU will ignore tradeline accounts that are reported with a bankruptcy status code or manner of payment/MOP code of "7" if there is at least one bankruptcy reported in a public record. In this scenario, we are assuming that the date filed and the date discharged in the public record are more accurate than the dates in the tradeline, i.e., specific filed and discharged dates do not exist in the tradeline.

•If the bankruptcy is not reported in a public record, but a tradeline is reported with a bankruptcy status code, then the lender will need to verify the actual filed and discharged dates to determine that the bankruptcy meets the 24-month requirement for DU loans.

Identification of foreclosures(including deeds-in-lieu of foreclosure) in the credit report:

DU applies the following guidelines to the processing of foreclosures:

•Mortgage accounts, including first liens, second liens, home improvement loans, HELOCs, and mobile home loans, will be identified as a foreclosure if there is a current status or manner of payment/MOP code of "8" – foreclosure, or "9" – collection or chargeoff.

•If a foreclosure was reported within the 24-month period prior to the credit report date, the loan casefile will receive a Refer W Caution/IV and will be ineligible for delivery to Fannie Mae.

•If the filed date and the satisfied date of the foreclosure are both unknown, but it appears that the foreclosure occurred within the 24 month period prior to the credit report date, then DU will return a Refer recommendation if the loan would have otherwise received an Approve recommendation. The lender must confirm that the foreclosure did not occur within the most recent 24-month period.

•If a foreclosure was reported more than 24 months before the credit report date, the existence of the foreclosure is acceptable provided there are no additional eligibility criteria applied to the loan.

•Foreclosure laws vary by state and the time it takes to complete the process may vary by state. DU assumes that the date the foreclosurewas reported in the tradeline is the date of the foreclosure sale or liquidation. The lender must confirm that all foreclosures are satisfied.

FHA - 36 months...Foreclosure or Deed in Lieu of Foreclosure, only allowed to shorten the time to 24 months if extremely, extremely compelling extenuating circumstances. Divorce, inability to sell home due to relocation, etc...not allowed. Death of Wage earner, Loss of Industry/Jobs to entire region, Extreme Illness - allowed.

[hollywood007]

very good post. good material.
that does make sense and makes it more clear as to why some people got approved and others didnt...
thanks

[shannonek]

Moe,

Is there any adverse credit rating for a loan modification????
Haven't gotten it yet, but I am very optimistic!

[Andrew]

That is a very good question. From what I hear there is no negative reporting on your credit reports. But technically they could put a comment on there since you are not abiding by your contract. I run 100's of credit reports a day in my line of work and see all different types of comments on trade lines. I guess it's really up to the creditor on whether they want to put a comment or not.

[aifanejr]

Is it true that a short sale with no missed payments is less damage to your credit score than missing a payment (with no short sale)?

[03penny]

I would think so under the way the scores are done now. One great resource that I have used and recommended for how things impact your credit score is myfico.com. You can actually run scenarios through this and it will tell you what your score will be and what it will be in the next few months. These are the people that make the score. It is much more accurate than any of the other score simulator services.

Yes the Short Sale will not impact your credit in the fashion that a Foreclosure or Deed in Lieu would impact your credit...if you keep the mortgage current during the process it is a very light ding to the credit in the scheme of things. Be aware that it will impact the score, but by no means to the degree that Foreclosure or Deed in Lieu.

Also you would be far more eligible for another property purchase a lot faster than with the Foreclosure or Deed in Lieu scenario.

[jenn83]

Short Sale
The good news for short sale sellers is the wait is much shorter before buying another home. "They can buy again in about 18 months at a good interest rate," says Steep.


OK this says 18 months. Recently we were told we can't go further with a VA loan because a short sale is showing on a CAIVRS report that we went into foreclosure in 2006. We sold that home in 2005 via a short sale. What am I not understanding about this exactly? Any help would be greatly appreciated.

Jennifer

[Moe Bedard]

Jenn...........unfortunately that information was originally posted on January 4, 2008 and alot has changed since then...........

If you were not late going through the Short Sale process it should be o.k......but in the realm of lending if your mortgage shows on the credit as a 1X120 in other words.......4 months delinquent......to underwriting that would still look like a foreclosure even if it was a Short Sale.


Here is a bit of the update on the same information:



Can a seller buy again under two years? Not true, says Coy, "It's an utter myth that a consumer 'can buy again in about 18 months at a good interest rate.' Fannie Mae guidelines require 24 months' seasoning, and there's no way to get around this."

Hi Jenn,

Actually, there has been a more recent change to Fannie Guidelines as of MArch 31. I am posting a paste from the FAnnie release notes 7.0 dates MArch 31, 2008. These newguidelines take affect May 31, 2008.

I have highlighted the relevant text in red

Regarding foreclosures:

Mortgage Delinquencies

Loan casefiles in which the borrower’s credit report contains a mortgage tradeline that was reported within the last six months, and was 60 or more days past due when the account was last reported, will receive a Refer with Caution/IV recommendation. However, if the mortgage tradeline was not 60 days or more past due when the account was last reported, but has been 60 days or more past due in the last 12 months, the loan casefile will receive an Ineligible recommendation.

Foreclosures

As stated in Announcement 08-08, Fannie Mae is modifying its policy on prior foreclosures. If a foreclosure was reported within five years of the credit report date, the loan casefile will receive a Refer with Caution/IV recommendation.

DU will no longer issue a Refer recommendation when the date of a foreclosure cannot be determined. However, DU will issue a message stating that if the foreclosure was filed within the last five years and has not been satisfied, the loan is not eligible for delivery to Fannie Mae.

Translated into English, this means:

If someone is currently 60 days late at time of refi/credit pull your chances are slim/none of new loan. If the borrower is current at time of credit of pull, but within the last 12 months was 60 days or more late, your chances of refi are none. Period.

IF there is a foreclosure on credit report within last 5 years that shows it has been resolved, your chances are slim/none. If there has been a foreclosure that is still open, unresolved, (like a walk away) within the last 5 years your chances are absolutely none.

No question these are harsh guidelines, but at the moment, probably necessary to attract investor money into the MBS market. The pendulum will probably swing more towards the lenient side again in a few years, but at the moment it is very tough.

Moral to the story:
Do not just stick your head in the sand and walk away or fail to make attempts to work with the lender/servicer. Try to get some resolution and work it out to avoid foreclosure.

Get some help here and from Loansafe premium services if you feel like it is too complicated or don't have the time or inclination to fight it out. That is what we are here for.

Originally Posted by *** Damiano

Jenn...........unfortunately that information was originally posted on January 4, 2008 and alot has changed since then...........

If you were not late going through the Short Sale process it should be o.k......but in the realm of lending if your mortgage shows on the credit as a 1X120 in other words.......4 months delinquent......to underwriting that would still look like a foreclosure even if it was a Short Sale.


Here is a bit of the update on the same information:



Can a seller buy again under two years? Not true, says Coy, "It's an utter myth that a consumer 'can buy again in about 18 months at a good interest rate.' Fannie Mae guidelines require 24 months' seasoning, and there's no way to get around this."

[Karyn Elliott]

Moe, what if a persons situation already has their FICO at or below 400, will it go down to 200? And what can I do to raise my FICO?

[OneHungryChicken]

With the high impact of forclosure on the credit score would it make sense to file a total BK afterwards and get a clean start?

[FacingNorth]

Is "jingle mail" (just walking away from home and mailing keys to lender) considered a foreclosure or a deed-in-lieu? Doesn't deed-in-lieu require actually signing papers to make it legit? If it's considered foreclosure, wouldn't it be better to do a deed-in-lieu?

[Moe Bedard]

Facing North,

Yes that would make more sense because they would be reflected the same on the credit...........however, if you have more than one loan, a DIL would not be possible.

[cute101]

ok i understand that the short sale has less impact on the credit report than foreclosure but ive heard that on deficiency judgement there are less chance you will be hit paying the difference in foreclosure than shortsale.i live in california and ive heard my friend who had foreclosured did not receive a 1099 while the one who did the short sale received 1099.i really dont care about my credit since i can no longer afford to keep my investment properties and its mess up right now anyway.but all im concern about is we can be able to keep my primary and start fresh.but if im going to pay the deficiency (im broke) then i would rather go into foreclosure.i know its sound horrible.but im financially and emotionally exhausted and confused on which way to go.any insight.pls. pls help.thanks

[Moe Bedard]

the mortgage debt could have been forgiven on one due to the type of property and not the other.............but you would need to speak to an accountant for attorney familiar with the tax laws in your state............

Mortgage Forgiveness Debt Relief Act

[charmed786]

Can a bank come after you with a deficiency judgement in Florida?

[wingman69]

Hi all,

Man! What a mess!

All of us are so conditioned into believing in a system that is solely based on a number-the great "FICO". And, I'm sure many of us will lend all the reasons why we should be in response to my input here.

The FICO score is simply an "I love debt " Score. When one awakens to this reality, like me, they will let go of the need to maintain it. I have made the decision to stop worshiping at the altar of the great FICO.

My goal is now to become 100% debt free. This has to exclude all credit cards and borrowing. By doing this it will mean that my credit score will eventually cease to exist. Is that so bad? Oh, but what about attaining a home loan? Well, there is a little known thing called...."Manual Underwriting" where a real banker takes on the arduous task of actually looking at your finances without merely plugging in a number and then waiting for the computer program to spit out a program/plan based on that number.

I have awakened from the "American Dream". I now find myself empowered by a plan so simple in principal, that I can't believe I could not see it before.

I will let go of my house.I do so with no reservation. I have done everything within my power, but greed is a power greater than mine and it rules the day in every market, including housing.

We live under the illusion that our credit scores make us better, or worse, than the next guy/girl. Once you surrender and let go of this falsehood you are free to make a better life.

Who wants to play "Kick the can" ? Everything I have read here on this site, and at the treasury departments website, tells me that we are merely being offered a rent for life policy. Its more of the same. Go and see for yourself, as I had to do.They are offering a 5 year deal. Lower interest rate for 5 years, then moderate increases thereafter.

The reality is(my reality)that if you are paying more than 25% of your "take home pay" toward your mortgage(tax/ins/principal/interest) and you have a car payment and a large helping of debt too, then you will never get any traction.I am now sitting at 54% ! I lost 1500.00 income a month. Income that should never have been included in my brokers numbers to begin with!

I do not want a bail out. I will bail myself out. Our government cant manage our money well, they never have.

I hope you all will find financial peace. I am well on my way. My goal will be to attain a FICO score that will not be detectable. There is a growing number of Americans who have awakened to a new reality. This reality includes living within our means and on less than we make.We will live debt free, including having a paid for house. Remember, 100% of forclosures involve a mortgage

Freedom is inevitable! As soon as we break away from what we have been conditioned into believing is normal, i.e. mortgages/car, boat, RV payments ETC. We love our debt, and we have great credit scores to prove just how much we love it. Stop using credit and it will cause that score to go way down. I have had 2 credit cards closed because of inactivity. I have since closed them all, at my request.

All the best,

David

[Irish Gal]

Excellent post David ! I agree wholeheartedly ! Good luck as you become debt and financially free. I am hoping to do the same

[wingman69]

Irish gal-

Thank you. I wish you all the best too.

Cheers

[ORNV3]

Right!

I've always been proud of my credit score... now it's headed for the toilet! I don't even care anymore. I've also realized that it's just a number and it says pretty much nothing about the kind of person you are.