Mortgage giants Fannie Mae and Freddie Mac have issued new rules, which will take effect Nov. 1, that will allow short sales for underwater borrowers who have never missed a mortgage payment. Previously, Fannie and Freddie allowed only home owners who had missed payments to qualify for a short sale.
Eligible borrowers under the new rules will need to show a hardship to qualify for a short sale, however. Hardships may include unemployment or a death of a spouse.
Inman News points out one potential flaw to the new rule, however: The nondelinquent home owners who undergo a short sale will likely take just as big a hit to their credit score than if they had missed loan payments and gone into a foreclosure.
“Under current national credit reporting practices, those nondelinquent borrowers are likely to be treated the same for credit scoring purposes as severely delinquent owners who go to foreclosure after months of nonpayment, or who simply toss back the house keys and walk away in strategic defaults,” writes Ken Harney for Inman News.
Credit agencies use no special coding to indicate that a short sale was without delinquency. Therefore, home owners could see their credit scores drop 150 points or more after the short sale.
However, officials at the Federal Housing Finance Agency, which oversees Fannie and Freddie, told Inman News they are “in discussions with the credit industry” to explore ways to fix the credit scoreproblem for those who haven’t missed a payment but undergo a short sale.
Source: “Damage to Credit Scores Could Trip Up New Fannie, Freddie Short Sale Program,” Inman News (Oct. 23, 2012)