When the news about the new short sale policies from Fannie Mae and Freddie Mac first broke out, it appeared to be a ray of hope for “underwater homeowners” – particularly the ones who had not missed a single payment on their mortgage in spite of the huge drop in the market value of their properties.
But recently, news also broke out that these non-delinquent homeowners may have something else to lose if they do accept the short sale package offer from the federal government. If their credit score would be rated based on current practices of credit reporting agencies, then it could decrease by as much as 170 points the moment they short sell their homes. This kind of impact is definitely no better than what they would have suffered if they had simply proceeded with a strategic default or had their homes taken away by foreclosure agents.
The current credit reporting policies look upon short sales as a result of months of non-payment. As of yet, there is no new ruling regarding short sales that have not resulted from non-payment. Until an amendment or a new policy is approved for credit reporting agencies, then these bureaus would have no choice but to consider the new batch of short sale applicants as delinquent payers as well.
Thankfully, FHFA is already looking into the problem and considering ways to address the dilemma the new short sale program had created. Also apparently collaborating with the federal agency is the CDIA or the Consumer Data Industry Association. Three of its members are also the nation’s largest credit reporting bureaus.
On the other hand, Fair Isaac Co. – the company that developed the risk assessment model used for determining your credit score – requires at least 24 months of credit and consumer data before they can make any substantial changes to how they compute credit scores. As such, any changes to prevent misrepresentation of the new short sale program’s applicants should be done before the people in charge of computing your FICO score get a hand on your latest credit history report.
Some have suggested financial companies to report short sales made under the new program as “paid as agreed” to avoid any adverse impact on the individual’s credit score. It is a viable suggestion but still a suggestion and with no word as of now from any of the major players about what may possibly happen once November 1 comes around and the new short sale program officially launches.
Meanwhile, even in worst case scenario and your credit score drops because of short selling your house, there are still a couple of things you can do to quickly improve your credit score and get it back up.
• Apply for a credit card – or keep them alive if you already have one. It’s important to show that you can still be a good payer even if you had to apply for a short sale.
• Keep credit card balances to a minimum. The point is to prove you can own and manage one – that’s it.
• Apply for a loan – and make sure to repay it. Again, it’s all about proving your ability to pay.