Mortgages, myths and independence
Tomorrow is July 4, commonly known as Independence Day celebrating the adoption of the Declaration of Independence declaring our independence from Great Britain in 1776. But if you’re in the market for a home and require a mortgage to make that happen, you may be looking to declare your independence from your bank, especially if a short sale or foreclosure was in your past.
As a consequence of the bursting of the housing bubble and the resulting under water properties, banks started accepting short sales in an effort to get the property off their books and eliminate the necessity of a full foreclosure. A short sale involves seeking approval from your mortgage lender to sell your home for less than the balance of the mortgage as a way of avoiding foreclosure.
One of the reasons homeowners worked toward finding a buyer rather than just walking away from the property was the assumption that a short sale would have a lesser impact on their credit rating and would allow homeowners to rebuild their credit scores sooner. In fact the guidelines from Fannie Mae and Freddie Mac, who approved most of the original mortgages, indicate that short sale sellers should be able to buy another home in two years’ time as opposed to the seven-year waiting period required after a foreclosure proceeding.
Many of these short sales buyers are starting to get back into the market thinking they will qualify for financing again. Unfortunately, they are finding out that what was a common belief that a short sale can affect your credit score less than a foreclosure is not necessarily the case.
Fair Isaac or FICO, the company that provides analytics for credit scoring, says credit scores for either short sales or foreclosures are negatively affected about the same, for example: 30 days late: 40 to 110 points, 90 days late: 70 to 135 points, foreclosure, short sale or deed-in-lieu (voluntarily turning over the deed to the property to the bank): 85 to 160, and bankruptcy: 130 to 240.
Part of the reason short sales are lumped in with foreclosures at the credit bureaus is their inability to code short sales differently from foreclosures. This problem is just starting to surface since more short sale sellers think enough time has elapsed for them to qualify again for a mortgage. Florida Sen. Bill Nelson has asked federal regulators to start looking into this problem, and credit bureaus are considering a new coding system for short sales, so help may be on the way.
In the meantime, until this credit scoring issue is resolved, homeowners who are facing foreclosures need to decide if it’s in their best interest to a pursue short sale. Avoiding a foreclosure is of course the best course of action, possibly by negotiating a payment plan with the lender or refinancing the mortgage for an extended period of time. There are also government programs that could be utilized for those who qualify to avoid a foreclosure.
There is a New England tradition said to have originated on Nantucket Island that when a mortgage was paid off the ashes of the mortgage document would be placed in the Newel Post of the stairway topped off with a scrimshaw button. However, some people think the mortgage button is really just a myth, since mortgages as we know them didn’t exist until long after many of these homes were built. Unfortunately, in the financial world we live in, there aren’t too many mortgages being set on fire as a matter of fact, I wouldn’t be surprised if some people think mortgages themselves are the real myth.