As a guideline for sellers in the past, wondering about the impact of a short sale versus foreclosure on their credit report, I would start by talking about the impact of having 30-, 60-, and 90-day late notices appear on their credit report. A 90-day late is a very bad thing and indicates to a creditor the likelihood of a pre-foreclosure situation. My understanding of the existence of a 90-day late on a credit report, was that it needed to be no earlier than 2 years in the past, to qualify for a loan today. Accordingly, I would inform my clients of the very real possibility that a short sale (which will often have a missed payments from the start of the process, through to the conclusion), would result in their inability to get approved for a new mortgage for at least 2 years.

Fannie Mae just published their underwriting guidelines that will go into effect on August 1, 2008. The new guidelines will clarify the credit worthiness impact of someone hoping to get a conventional loan with underwriting from Fannie Mae after a short sale, deed in lieu of foreclosure, or foreclosure. Jamie Geiger was all over the announcement yesterday, which is where I found out about the new rules.

As you can see, if you click through to Jamie’s post, per Fannie Mae requirements, a short sale will prohibit a loan for 2 yrs. A foreclosure prohibits a loan for 5-7 years, depending on whether this was a primary or second home and whether you took cash out on the home being foreclosed.

Two years is definitely less than 5 years, and while these new guidelines are exactly inline with what I had previously believed to be the case, it’s reassuring to see that they are now documented. As a reminder, if you are facing the possibility of foreclosure you absolutely owe it to yourself to at least attempt to short sale your home. There’s no guarantee of success with a short sale, while if you do not list your home, there is a guarantee of foreclosure.

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