Home > Mortgages > How Short-Sale Survivors Can Get a Mortgage

Comments 0 Comments

Need to finance a home this year? If you had a previous short sale, pay very close attention to your credit report, because it might list the home as a foreclosure. It’s important to know how this difference can prevent you from getting a new mortgage again, and how you can deal with it so you can get a mortgage.

Maybe you’re purchasing another home to live in, or for investment property. Perhaps you’re financing your primary home for a specific purpose. Whatever the reason, the credit reporting from the previous shorted lender can make or break your new mortgage.

Short-selling allows homeowners to avoid foreclosure. Foreclosure involves defaulting on the mortgage, and essentially giving the house back to the bank, and is typically seen as the worse event of the two, in terms of credit-worthiness.

Lenders are obligated to report the true and exact circumstances surrounding a delinquency. When reporting on a short sale, they will typically report “Settled for less than full balance.” This is what the new lender you’re working with on your loan will want to see because this indicates the previous property was a short sale.

However, while lenders do have a responsibility to report accurately to the credit bureaus, it doesn’t mean they always do. It’s not uncommon to see a previous lender reporting the property as “Settled for less than full balance, chapter 9.”

Enter a red flag…

The Credit Report Codes You Need to Watch Out For

If the previous lender includes the following codes on your credit report, you’ll need to put the brakes on your new mortgage loan process: Chapter 5, 8 or 9.

These classifications are synonymous with a foreclosure, which can deter your ability from successfully procuring a mortgage two years after a short sale.

For a short sale, a borrower is eligible for conventional loan financing 24 months post-short sale at 80% loan-to-value or lower.

But for a foreclosure, a three-year window is required to get a mortgage again with as little as 3.5% down on a primary home with an FHA loan. Seven years must have passed for the homebuyer to qualify for a conventional loan post-foreclosure (or, four years with extenuating one-time economic hardship circumstances).

So the addition of chapter 5, 8 or 9 flags the previous short sale on the credit report as a foreclosure, thereby making the loan ineligible for conventional financing in a shorter time frame.

How to Challenge the Code

All mortgage companies originating run each and every loan through what’s called an automated underwriting system (AUS), sort of like Google for mortgage lenders, but it evaluates the credit, debt, income and assets — the total borrower picture — and gives a preliminary approval. The chapter 5, 8, or 9 prevents the AUS from issuing the preliminary approval.

Here’s what you can do to challenge the item:

  1. Write to the creditor.
  2. Include a copy of the final settlement statement indicating the previous property you owned was a short sale, as well as a copy of the grant deed transferring the property from you to the buyer.
  3. Explain to the creditor that there is an erroneous item (the chapter 5, 8, or 9) on your credit report, and that it must be removed to indicate a short sale.
  4. Wait about 60 days to receive the confirmation letter.
  5. Re-apply for the new mortgage.

Because there were so many short sales processed in recent years – and this is especially true with the bigger banks – lenders’ credit reporting may not have been as accurate as it could have been. So this is exactly why it’s especially important to check your credit reports before you apply for a mortgage. (You can do this for free once a year from each of the three major credit reporting agencies.) If you find these foreclosure codes listed on your short sale before you apply for a mortgage, you’ll know that you need to clear up the error first in order to put yourself on the path to a new mortgage.

[Editor’s Note: If you’re working on rebuilding your credit after a short sale, monitoring your credit scores can be a great way of tracking your progress. You can do this for free using the Credit Report Card, which updates two of your credit scores for free every month.]

More on Mortgages and Home Buying:

Image: Brian McEntire

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team