Fannie Mae and Freddie Mac are issuing new guidelines for mortgages in early November to provide homeowners with a much simpler way to know if they qualify for a short sale. These guidelines are designed to streamline the difficult process so that struggling people can get help faster. It’s a sort of “cheat sheet” for people in need. Yet, it looks like the ones who will be cheated are the underwater homeowners who’ve paid their loans on time.
Typically, FICO and other major credit score companies distinguish between delinquent borrowers and those who have made timely payments on their loans. Not this time. Underwater homeowners who have solid credit scores will take a heavy blow from credit companies if they choose to participate in the short sale program; some companies promising to drop credit scores by over one hundred points. How could this be?
FICO, like many other credit score companies, uses an algorithm to predict potentially risky clients based on past bill payments, debt to available credit ratio, length of credit history, and more. Unfortunately, this algorithm is not currently sophisticated enough to differentiate between short sales made by people who paid on time and those who didn’t. But that’s not all.These credit companies have no plans to change their algorithms. It seems to them that a short sale deserves a negative mark on the credit record, no matter what.
So what do you do? Completing a short sale seems to yield an overall better result. Although the credit companies promise to drop scores for short sales, completing a foreclosure may result in a drop of 200 to 300 points and prevent a seller for up to seven years from qualifying for a new mortgage. The new Fannie Mae and Freddie Mac plan, however, allows for sellers to become eligible for a new mortgage in as little as two years.
Ultimately, Fannie Mae and Freddie Mac’s new guidelines provide more options to the underwater homeowner, which hopefully will prevent more people from sinking further into debt.
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