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Diane Gallagher

New rules take effect beginning of November

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Posted: Friday, October 26, 2012 6:55 am

Fannie Mae and Freddie Mac have issued new rules, which will take effect Nov. 1 that will allow short sales for underwater borrowers who have never missed a mortgage payment.

Previously, Fannie and Freddie allowed only home owners who had missed payments to qualify for a short sale. The program offers huge potential relief for hundreds of thousands of underwater homeowners who have continued paying their albatross mortgages on time to finally get rid of them.

Under the new rules, eligible borrowers will need to show a hardship to qualify for a short sale. Hardships may include unemployment or a death of a spouse.

Inman news points out one potential flaw to the new rule, however: The nondelinquent home owners who undergo a short sale will likely take just as big a hit to their credit score than if they had missed loan payments and gone into a foreclosure.

“Under current national credit reporting practices, those nondelinquent borrowers are likely to be treated the same for credit scoring purposes as severely delinquent owners who go to foreclosure after months of nonpayment, or who simply toss back the house keys and walk away in strategic defaults,” writes Ken Harney for Inman News.

Credit agencies use no special coding to indicate that a short sale was without delinquency. Therefore, home owners could see their credit scores drop 150 points or more after the short sale, and even drop more it you do a foreclosure.

However, the good news is, officials at the Federal Housing Finance Agency, which oversees Fannie and Freddie, told Inman News they are “in discussions with the credit industry” to explore ways to fix the credit score problem for those who haven’t missed a payment but undergo a short sale. There are always more issues on the table to look at when you decide to sale your home as a short sale or let it go to foreclosure. Not every situation is the same, and remember, not every bank has the same criteria for every borrower even though you might have the same bank.

Diane Gallagher is the president of the Lodi Association of Realtors and can be reached at