Many distressed homeowners who find themselves under water on their mortgage and unable to make the payments face a choice: should I let the house go through foreclosure or should I try to arrange a short sale?  This dilemma leads many to ask whether a short sale has less of a negative effect on their long term credit score than a foreclosure.  If one considers only his or her future credit score, the answer is that there is probably no difference. However, a short sale is preferable if you hope to get another mortgage in the future. If you choose the short sale option, you have a chance to qualify for conventional mortgage financing several years sooner than you otherwise would if you lost your home through foreclosure.

Pursuant to Fannie Mae Guidelines, which typically govern the underwriting standards used to determine whether you can qualify for a conventional mortgage, a consumer can qualify for financing as soon as 2 years after a short sale depending on the other information on the consumer’s credit report. In contrast, a foreclosure will preclude the possibility of obtaining financing for a minimum of 7 years (absent extenuating circumstances).  If you choose the short sale option, you need to make sure that the sale is properly reported on your credit report.  This will allow you to re-enter the mortgage financing market much sooner than would otherwise be the case.

The current problem is attributable to the fact that lenders and credit bureaus presently have no code or notation to indicate that a particular mortgage account had a short sale. This is happening even though the industry’s standardized reporting requirements dictate that the original mortgage holder should report the account with a “current or paid as agreed” in the manner of payment field, and denote the short sale in the “Remarks” section as “settled for less than full amount” or some similar notation. In most of the cases where a short sale has occurred lenders are not reporting it this way.

The problem is made much worse because of Fannie Mae’s underwriting practice concerning potential mortgage applications.  Fannie Mae identifies mortgage accounts that are reported with a “collection or charged off” code as foreclosures. In other words, if the original mortgage lender is reporting your short sale as “settled, charged off” in the manner of payment field, Fannie Mae is wrongly identifying that language as a foreclosure. This means that even if you had a short sale, and not a foreclosure, your mortgage application will be denied unless 7 years have passed since that notation was made.

If you have been denied conventional financing because your short sale is being identified as a foreclosure, you may have a legal cause of action to recover the damages you have suffered as a result.

Bob Healey is a licensed attorney and principal with Healey Law, LLC, a full-service St. Louis law firm, specializing in handling cases for accident and injury victims, injured workers, and consumers who have been abused or mistreated by debt collectors, banks, car dealers, mortgage companies and credit reporting agencies. With 4 convenient locations in Chesterfield, Downtown St. Louis, North County (Bridgeton near DePaul Hospital) and South County (on Tesson Ferry across from St. Anthony’s Hospital). Bob has over 25 years of experience representing clients in the State and Federal Courts in both Missouri and Illinois.  For more information visit: