Credit Report Errors Prevent Purchase After Short Sale
Errors On Your Credit Report Could Cost You Thousands
The credit monitoring companies aren’t lying when they make this claim.
Boomerang home buyers are pouring back into the housing market only 2 years after a short sale or deed in lieu of foreclosure, only to be met with frustration and confusion by inexperienced lenders turning down their bid for homeownership.
Fannie Mae guidelines state that 2 years after a short sale or deed in lieu, a buyer is eligible to apply for a conventional loan with a minimum 20% down payment and 680 credit score.
We have successfully financed home loans for boomerang buyers after short sale, many of which found us online after their lender turned them down.
There are several credit reporting errors that seem to be most common and will prevent a loan from being approved by through Fannie Mae’s Desktop Underwriter (DU) program.
If you fell behind on your payments to the extent that the loan went into default, which typically happens after missing 3 payments, the lender may report the defaulted mortgage to the credit reporting bureaus as foreclosure started.
Simply having a defaulted mortgage reported as foreclosure started does not mean that you were foreclosed on. You may be required to provide the lender with the short sale agreement and HUD 1 settlement statement from the short sale, if the lender requires further proof of the inaccuracy of the reporting.
The correct comment that should be reported after a short sale or deed in lieu of foreclosure is “Account settled for less than amount owed”, but sometimes this isn’t enough.
Inaccurate Reporting of Status Code
Along with the comments you will find on a credit report that describe the status of the debt, the credit bureau will assign a status code, or MOP code represented by a number that describes the nature of the reported item.
identified as a foreclosure if there is a current status or manner of payment/MOP code of “8” (foreclosure) or “9” (collection or charge-off)
A common error in credit reporting is the inaccurate designation of the pre-foreclosure as either a collection, charge off or foreclosure. The error that creditors make that will result in a Refer/Ineligible DU decision is usually the result of the following excerpt from the Fannie Mae Underwriting Guide:
Mortgage accounts, including first liens, second liens, home improvement loans, HELOCs, and mobile home loans, will be identified as a foreclosure if there is a current status or manner of payment/MOP code of “8” (foreclosure) or “9” (collection or charge-off); or if there is a foreclosure-related Remarks Code present in the credit report data and associated to the trade line.
Lender Caused Credit Errors
It has now happened 3 different times in the past 6 months that another lender runs the credit report and is unable to get an Approve/Eligible from DU, yet when we run the Credit and DU, we are able to get the loan approved. The interesting part is that all other criteria for buying 2 years after a short sale are met.
Lenders use credit reporting services to pull credit, which is then submitted automatically to Fannie Mae DU for processing. I can only surmise that all of these credit reporting services do not submit the information to Fannie Mae in the same format, resulting in the loan being declined by some lenders, and being approved by others.
Manual Underwriting Fannie Mae Loans
The resolution of many of these inaccuracy issues can be resolved by you contacting your old lender and requesting them to accurately report the status of the short sale to each credit bureau in an attempt to correct the issues.
The challenge with taking this route is that it’s not always easy to get what you need from a lender that you haven’t had communications with in over 2 years. If you are successful in getting the lender to cooperate, getting the credit bureaus to make the corrections can also present problems.
One way to circumvent the challenges with inaccurate credit reporting issues is to manually underwrite the loan. Manual underwriting is a way to get around the way that data is submitted to DU.
If you have questions about purchasing after a short sale, have been turned down when you think you shouldn’t have been, or are in need of a manual underwrite on your Fannie Mae loan, leave a comment below, call or shoot me an email and we’ll comb through your loan application and eliminate any of these errors that may be preventing you from buying.