The difference depends on the last 12 months of mortgage payment history. As long as the mortgage history does not contain one or more 60+ day late payments, the sale with less than full mortgage balance paid is considered a "Short Sale" and the borrower is immediately eligible for another mortgage to be delivered to FNMA.
If the mortgage history shows 1x60x12 or worse, the sale with less than full mortgage balance paid is a "Preforeclosure". You are correct; Preforeclosures are ineligible for a Fannie backed loan for two years.
Here is the link to the companion FAQs to Announcement Letter 08-16. Fannie spent a little more time explaining the differences in eligibility:
The distinction is a fine one but critical. Additionally, I have commented on this question before with a little background on why Fannie Mae makes a distinction between "Short Sale" and "Preforeclosure Sale" here:
Regarding the treatment of a mortgage balance paid less than in full: It all depends on the borrower's negotiations with the lender. As long as the lender chooses not to include the "Settled for less than full amount" code in the comment section, there is no way for Fair-Isaac to identify that the mortgage was paid short . There are situations in which this is advantageuous to the lender (eg the borrower is short refinancing and executing an unsecured note for the shorted balance) The attorneys with whom I work make this a routine part of their negotiations when a benfit can be shown for mortgagor and mortgagee.
Regarding a HELOC: Florida is a Lien-Theory state; California is a Title-Theory state. The difference in hypothetication has significant legal ramifications. For example, in a lien-theory state, foreclosures may not proceed without a civil suit and judicial order since the borrower is fully vested on title. Foreclosure is much simpler (and swifter) in a title-theory state since the title is held in trust.
The impact of lien-theory on a HELOC in Florida is that a lender may release the lien on open-end credit (ie HELOCs) without closing the account. It simply becomes an unsecured revolving account. Mortgages, since they are closed-end loans, must be closed to release the lien. Often it is possible in Florida to persuade a lender to leave the HELOC open in order to faciliate the short sale of the primary mortgage assuming the borrower demonstrates creditworthiness and an ability to repay. I imagine that in a title-theory state the same is not true; and it is important to note that usually it is not advantageous for the borrower to do so.
Lastly, I hope I don't sound like I'm (for lack of a better term) nit-picking. It's difficult to project proper tone in a rebuttal. Please imagine an easy-going, thoughtful tone. :-) My background is primarily mortgage underwriting and working with credit data and Fair-Isaac. Everything you've stated is absolutely correct... it's just there are options available to borrowers who negotiate well. And it may be that mortgagors in lien-theory states have more leverage than mortgagors in title-theory states.
CFS Mortgage assists homeowners who have recently been through a foreclosure, short sale or have recently emerged from bankruptcy.
Thanks for the correction on title hypothecation in California. My information is obviously out-of-date, and that underscores a corollary principle to your advice about selling: when buying, work with a local loan originator.
Out-of-state originators, unless they work for banking behemoths with the proper depth of back-office operations, simply do not have the expertise on the buyer's local market, laws, and community loan programs. I'd be lost trying to originate in California; Texas is a complete mystery. The state constitutional ban on refinancing within 12 months of prior refinance, for example (if I've got that right), makes no sense to me, apparently is vitally important to Texans.
Btw, Florida is very friendly to deficiency judgments - perhaps because judicial foreclosures are routine here.
With the exception of two short sales last year, all the rest of mine were more than 60 days past due, as were the short sales from the year before that and the year before that. I suspect the bulk fall in that category. Most borrowers don't begin to think about a short sale until the Notice of Default is filed, and that doesn't get filed until the borrower is at least 2 months behind -- by the time it closes, they are 5 or 6 months in arrears. But it is interesting to note the preferential treatment borrowers receive who are not 60 days late. I will pass on this information because my last short sale borrower was not delinquent at all. Rare, but it happens. :)
Most people in CA think lenders can't purse a deficiency judgment against them, and this is not always true. I realize where you live the laws are different, and CA is a lien theory state. For that reason, lenders need to file a judicial foreclosure to obtain a deficiency judgment (and few choose that option), or else be a hard-money second who has lost the security for the loan.
It's those non-purchase money second loans that can come back to bite.
Short sales and the laws that govern them differ from state to state. What is true in California may not be true in states such as Texas and Florida, which seem to me to follow strange laws very contradictory to the way we do things in California.
Just another reason why every short sale seller should seek legal and tax advice before commencing a short sale.
Q 7. Does a short sale adversely affect a defaulting borrower?
A. Yes. Lenders will report the short sale as being settled for less than the full balance. This would show up on the borrower's credit report as a negative mark for 7 years. Calif. Civil Code 1785.13.
Lenders I work will tell me that while it is true that Fair Isaac has no separate system in place for short sales, they are reported as Credit Score Factor 22 on your credit report, which is the same score factor applied to foreclosures.
I am curious about the answer given by the person from Daytona Beach about buying again after a short sale and obtaining a Fannie Mae loan. The last piece of information I received from Fannie Mae, announcement 8-16, says this about seasoning after a short sale:
"Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action."
If this has changed without notification, I need to update my book before it hits the presses at the end of this month.
And yes, your HELOC is included -- if this was a purchase money loan, and the foreclosure is by trustee's deed, CAR says there is no deficiency. However, if it's a hard money loan, taken out after you have purchased the property, even under a trustee's foreclosure, the second lender may come after you and pursue the right to obtain a deficiency judgment, even if the note and trust deed was released through a short sale. Many borrowers and real estate agents are unaware of this provision affecting California short sales.
Deep River is dead on regarding all statements made.
At present, Fair-Isaac (the company which provides credit scoring models) does not have a policy of reporting short sale mortgages. Your motgage tradedline includes such information as
High Credit Amount
Date of Last Activity
In a short sale, your lender agrees to accepting payment in full for less than the current balance. The lender will report receipt of your final payment and update the Current Balance to $0.00. As far as the scoring model goes, that is considered a closed, paid in full account.
However, some lenders might add a comment line "Settled for less than amount owed" If your payment history is on time, there is little or no impact on score. If your payment history is poor, the late payments will reduce your credit score.
There is absolutely no way to suggest a uniform score range drop. Scores are a prediction of future default risk based on past credit performance. Many factors go into calculating credit scores. I've seen folks 12 months out of CHpater 7 Bankruptcy with credit scores 660+.
In any event, closed accounts and derogatory information remain on your credit report for 7 years. In the lender doesn't add a comment about settling for less than amount owed, there is no way to identify a short paid mortgage.
Further, Fannie Mae will not impose a waiting period for a new Fannie bancked loan after a short sale so long as the last 12 payments were made on time.
Regarding the HELOC: HELOCs are basically a credit card secured by your home. Since they are revolving, open end credit lines, the bank is under no obligation to close the account after the sale. All the bank must do is release the collateral, but your obligation to repay can continue. If you wish to have the bank close the HELOC account after the sale, that condition must be part of your negotiation with the lender.
A Realtor with experience in short sales can help you obtain the best outcome.