Be wary of credit reports on short sales
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By Scott Sheldon  January 31, 2014 12:00 am

Planning to finance a house in 2014? Had a previous short sale? Pay very close attention to your credit report. There is a crediting report status that indicates foreclosure and if not handled correctly, will derail your loan attempt.

Short sale or foreclosure?

A short sale involves selling a house for less than what is owed. For example, a house sells for $300,000 but $500,000 was owed on the property. The lender is shorted the $200,000 difference. This was an approach homeowners took in recent years to avoid foreclosure. Foreclosure is essentially walking away from the property and letting the bank take the property.

Maybe you’re purchasing another home to live in or finance an investment property? Or perhaps financing your primary home for a specific purpose?

No matter the reason, the credit report from the previous lender can make or break your new mortgage. In short, lenders are obligated by law to report true and exact circumstances surrounding the previous delinquency. Lenders, when reporting on a short sale, typically report “settled for less than full balance.” This language indicates the previous property was a short sale. While lenders are required to report correctly, that doesn’t always happen. All too common, credit reporting saying “settled for less than full balance, chapter 9.″ This credit reporting becomes problematic in obtaining your new mortgage.


Status to watch from short sales

Chapters 5, 8 and 9 are synonymous with a foreclosure – the big F word in mortgage lending which prevents a consumer from successfully getting a mortgage two years post short sale.

Here’s the requirement – a borrower is eligible for a conventional loan 24 months post short sale at 80 percent loan minimum.

How status affects new mortgage loan

All mortgage lenders run each loan through what’s called an automated underwriting system (AUS), which is like a search engine for mortgage lenders but evaluates the credit, debt, income, and assets of the consumer and renders a preliminary approval when the loan is eligible for delivery to Fannie Mae or Freddie Mac.

The chapter 5, 8, or 9 status is identified on the credit report and does not pass an automated underwrite on a conventional mortgage, thereby stopping the loan before an official human underwriter reviews the file for creditworthiness.

Steps to take

1. Write the creditor reporting the erroneous credit status.

2. Include copy of the final settlement statement, aka final HUD 1 (closing statement from previous property), and a copy of the grant deed deeding the property from you to the buyer. You may need to get this information from the previous title company who handled selling your previous property.


3. Indicate in this letter whatever credit reporting status Chapter 5, 8, or 9,  it is so lender is aware of what needs to be corrected.


4. Wait approximately two months for confirmation.


5. Apply for mortgage again.


• Mortgage tip: If the previous property was in fact a foreclosure, a three-year window is required to get a mortgage again with as little as 3.5 percent equity on a primary home. Seven years must have passed for conventional financing post-foreclosure, four years with extenuating one-time economic hardship circumstances.


Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at

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