NEW YORK – Feb. 10, 2014 – Potential homebuyers with a previous short sale in their history should pay careful attention to their credit report. If they plan to apply for a mortgage soon, they should make sure the earlier short sale information was reported accurately.
In some cases, a short sale erroneously appears on their credit report as a foreclosure – a blemish that could haunt them much longer and prevent them from obtaining a new mortgage because it’s a red flag to a lender.
Typically, when lenders report on a short sale in a credit report, they’ll say, “settled for less than full balance.” That’s a key indicator for a buyer’s new mortgage lender looks for because it shows that the previous property was a short sale, not a foreclosure, according to Credit.com. Lenders have the responsibility to report accurately to the credit bureaus.
Credit.com says some other credit report codes will also hamper a borrowers’ ability to qualify for a mortgage any time soon: Chapter 5, 8, or 9 – which are often synonymous with a foreclosure.
A short sale borrower is eligible for conventional loan financing 24 months after a short sale at 80 percent loan-to-value or lower. If it’s a foreclosure, however, they may have to wait up to seven years to qualify for a conventional loan, or four years if they can prove it was a one-time economic hardship situation that caused the foreclosure.
Borrowers who have the short sale inaccurately noted in their credit report will need to contact the creditor and likely supply a final settlement statement showing the previous property was a short sale, and a copy of the grant deed transferring the property from them to the buyer.
Source: “Credit Report Error Sinks Short-Sellers Bids for a Mortgage,” Credit.com (Feb. 6, 2014)
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