Problem One

No Specific Short Sale Code

Problem

There is no short sale specific credit code.

Short Sales are still reported as a foreclosure on the Freddie Mac Loan Prospector (LP) automated underwriting systems (AUS) for a conventional mortgage, which results in a "Caution" loan denial. However, the Fannie Mae Desktop Underwriter/Originator (DU/DO) AUS has fixed this problem in DU version 9.1 effective August 16, 2014. For more FAQ's, details: DU Version 9.1 Augusts 19, 2014 Update

The erroneous foreclosure code for a conventional loan prevents a new mortgage for seven years, compared to a 2 year wait after a short sale.

The foreclosure code is commonly applied after 120 days of mortgage delinquency. Lenders commonly require mortgage delinquency first before providing a short sale approval. Because the short sale process can be lengthier than 120 days, credit code risks being coded as a foreclosure. Current short sale credit code is borrowed Metro 2 credit code for a foreclosure.

The erroneous foreclosure finding is not usually discovered until a past short seller applies for a mortgage again, and the problem  is not usually apparent on the credit report. Most often, the credit bureau associated with the loan submission to the AUS must be contacted to discover which credit repository is reporting the foreclosure.

The foreclosure code results in a “Refer/Ineligible” for Freddie Mac and can only be changed if an underwriter manually underwrites the new mortgage.

For all loan types: the difference in time between a short sale and a foreclosure to wait for a new mortgage

Conventional Fannie Mae/Freddie Mac:
2 yrs. with 5-20% DOWNPAYMENT with extenuating circumstance/Fannie Mae only
4 yrs. with 10% DOWNPAYMENT/Freddie Mac
7 yrs. if FORECLOSURE/both Fannie Mae and Freddie Mac

FHA:
NO WAIT if no lates prior to short sale 1 yr. if acceptable hardship

1 YR WAIT if acceptable extenuating circumstance on Back to Work                                                                                                                          3 yrs. if lates prior to short sale or foreclosure

                                                                                                                                                                                                                                                                                   

VA:
2 yr. wait commonly after short sale or foreclosure. Some extenuating circumstances may apply.

USDA:
3 yr. wait after short sale/foreclosure. Some extenuating circumstances may apply.

 

Solution

1. Metro 2 considered a specific short sale code but it did not happen. Fannie Mae did devise a work around and their automated Desktop Underwriter/Originator system has not coded a short sale as a foreclosure in recent months. Fannie Mae also has a workaround that was published in the DU Version 9.1 release. Freddie Mac needs to devise the same system change as the foreclosure code problem still persists for past short seller credit in their syste.(Note: This credit error only occurs on conventional mortgages.)

2. Require all short sale lenders to provide a letter (on their letterhead) to the seller at the short sale closing that reads: This loan closed as a short sale. All credit codings and markings reflective of a foreclosure should be deleted.”  This will save past short sellers additional costs to get this fixed years after the shortsale.

Continue to Problem 2