FHA/USDA/VA and Conventional Mortgage Loan News

Foreclosures and bank owned properties are getting a lot of play in the media right now and many buyers are focusing on these properties, along with short sales while trying to find a great deal on a house. For a change, I want to switch my focus from the buyer (the one I deal with) to the seller because I think there is some erroneous information out there about the difference between a foreclosure and a short sale as it concerns the owner of the property.

First of all, my credit sources tell me that foreclosures and short sales are reported exactly the same way to the credit reporting agencies, a rating of MOP 8. Granted, there would not be a public record report for the foreclosure, but the MOP 8 report identifies the trade line as a foreclosure. How with that effect the credit score? That depends on where you are starting. If you have a 700 credit score, it could knock 200 or more points from your score. If you have a 450 credit score, it may only knock 50 points off of your credit score. Either one will stop you from purchasing a home through conventional means for a minimum of four years using today’s guidelines.

This is what First American Credco (a credit agency) has to say about it: “While many people have associated a target point impact anywhere from 100 points on a Short Sale to 280 points on a foreclosure, Fair Isaac has told us that FICO risk scores do not distinguish between the three types of foreclosures. There are so many variables in a consumer’s credit report (do they have collections or other public records?) in addition to the foreclosure account that a point impact is almost impossible to gauge. Further complicating the score prediction is how the foreclosure account is reported, and if a public record accompanies it.”

Additionally, I would disagree with a statement I saw recently where it said that “In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.”  Most states, including Oregon, will zero out deficiency balances, not the case with short sales.  Please check out this recent post by Thesa Chambers from LaPine about short sale 1099s.

The other option to these two is the Deed in Lieu of Foreclosure. This allows the owner to avoid foreclosure and gives the lender possession sooner. It is still reported as an MOP8 but normally is negotiated to where there is no deficiency.

I do not give legal advice, if you have questions what you are doing or have in mind to do, you should consult someone that doesn’t just play a lawyer on TV, but actually is one.  Also, be aware there are scam artists out there that want you to sign over your home to them so that they can stop foreclosure. Be careful. Before you go any of those routes, let’s check out if the “Making Homes Affordable” program will help you. Refinancing might work if you are current on your mortgage and if you are not, a Loan Modification may help you out.

Questions about financing are always welcome. Contact me at: 541-342-7576/541-221-3455 Cell or email at eugeneloanguy@gmail.com. My speciality is mortgage lending and I really like working with first time home buyers.