Wednesday, October 15, 2008

Pre-foreclosure Sales and Short Sales

Fannie Mae has issued guidance regarding the amount of time that must elapse before someone can get a new loan when they have had a pre-foreclosure or a short sale. There is a difference between the two, even though most of us use the terms interchangeably.

A pre-foreclosure sale occurs when a borrower is delinquent on their mortgage and the lender accepts a lesser amount than is owed to speed up the foreclosure process and save expenses. There is a 2-year time period from the completion date of the transaction before that borrower (the seller) will be able to get another Fannie Mae loan.

A short sale occurs when a borrower who is NOT delinquent sells a property and the lender agrees to accept a lesser amount than is owed. The borrower will be able to get a Fannie Mae loan immediately after the short sale, provided the short sale agreement states that they are not obligated to pay the deficiency (the amount between what is owed and what the lender actually gets).

Pre-foreclosure sales and short sales both lower credit scores, but there is no standard way of reporting these actions to the credit bureaus, so it is impossible to say how much the credit score will be affected. A pre-foreclosure sale typically lowers the score much more than a short sale, only because the borrower has had recent mortgage payment delinquencies. Those late payments will show up on the credit report regardless of how the pre-foreclosure is reported.

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