South Orange County Blog from Bob Phillips

Short Sales Reported as a Foreclosure and Credit Provider Discrepancies

A lot of today’s buyers have completed a short sale in their recent history and are now seeking to purchase a home again, wondering when they’ll be eligible to do so.  Below is an article I just read from one of the lenders whose opinion I respect, and whose services I regularly recommend.

Short Sales Reported as a Foreclosure and Credit Provider Discrepancies 


Current Fannie Mae guidelines require a 2 year waiting period after a borrower has had a short sale to be eligible for new financing with a 20% down payment. The loan must be submitted through Fannie Mae’s automated underwriting system, Desktop Underwriter (DU), to insure the short sale on their credit will be approved. 

There are three different results DU will report a loan file as:

A)     Approved/Eligible-this means the buyer is approved

B)      Refer/Eligible-this means the buyer’s file must be manually approved by an underwriter

C)      Refer with Caution- this is a loan denial 

There are 3 main credit bureaus that collect and report the information-Experian, Equifax and TransUnion. Each of the bureaus makes their own decision on what internal codes are to be used in reporting a short sale. The code most commonly used is an I-5,“Installment with Severe Delinquency”. Unfortunately the code I-9 is sometimes reported which represents a “Foreclosure”. 

If two of the bureaus report an I-5 and one of the bureaus report the short sale as an I-9, Desktop Underwriter reads the report as a foreclosure and will issue a Refer with Caution because the waiting period after a foreclosure with FNMA is 7 years. 

Experian refuses to change the code from I-9 to I-5 if they are the bureau reporting the short sale as a foreclosure. Their reasoning is the definition of a short sale is a pre-foreclosure which is deemed a type of foreclosure. 

The remedy would be a manual underwrite because the buyer’s documentation would prove the home sold and the bank settled for less than full. However, most investors require a DU Approve/Eligible in order for them to purchase the loan so most lenders do not offer a manual underwrite on Fannie Mae loans. 

One solution has been waiting for the 3 year time period to elapse and finance with FHA. The waiting period after a foreclosure is 3 years with FHA. The down side is the mortgage insurance requirement even if the borrower has 20% down payment. That can be a very expensive option for the buyer. 

The takeaway from this is to know it is more than just meeting the time frame after a short sale for the buyer to be eligible for new financing. The buyer needs to be fully approved by having their loan file entered in Fannie Mae’s automated underwriting system and have the final decision be Approved/Eligible before entering escrow.” (End of my friend’s article.)

If you’re a potential home buyer who falls into this category, and you’re searching for a lender to assist you, I can recommend a couple of excellent ones.

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