Excerpt from… “The Big Score – Getting and Keeping It”

by Linda Ferrari, President Credit Resource Corp.

One of the nations top authorities on credit scoring issues and remediation.

What is a short sale and how can it affect my credit?

What about a Deed in Lieu of Foreclosure?

Is it better to file for a bankruptcy or to be foreclosed?

What should I do?

Every day, these questions are asked of me by frightened homeowners and mortgage professionals who are quickly trying to respond to the financial chaos that arises from the subprime mortgage fiasco which has touched millions of American homeowners.

Like no other financial crisis this country has seen since the Great Depression, the home lending fiasco has turned the American Dream into the American Nightmare. It has taken down millions of homeowners. It has brought the global financial markets to its knees. And it has catalyzed the implosion of massive banking entities whose greed proved the key to their unraveling.

The mortgage crisis has paralyzed the hopes and futures of millions of homeowners who are now wondering how they will manage their way through the lending crisis. How will they manage their credit through the turbulent economic and financial strangleholds in which they find themselves trapped? Is there relief? Is there any salvaging of the current housing market? What is the best path for consumers to get there?

There is no question that many families will have to leave their homes. Their biggest question now is how to most effectively do so (without devastating their credit scores) so that they will someday be able to buy a home again.

I speak to families every day, and I am heartened by those who have the wisdom and emotional strength to face these tough issues head on! They will be served well by their courage and their credit scores will be better off for it!

Now is the time for tough questions to be asked and answered.

Note: The guidelines to which I refer in this chapter are the recent selling guidelines of Fannie Mae & Freddie Mac, the two companies (recently taken over by the U.S. Government) that own or guarantee about half of the U.S.’s $12 Trillion in mortgages.

These companies base their decisions to purchase mortgage loans on guidelines that are a national policy. These guidelines mandate specific credit requirements and policies with respect to problematic situations such as foreclosure, deed in lieu of foreclosure, short sale, or bankruptcy. Specifically, a demonstration of an impeccable credit history must be shown for a designated period of time after the negative event has occurred.

THERE ARE NO REQUIREMENTS ON MORTGAGE LENDERS TO REPORT NEGATIVE INFORMATION TO THE CREDIT BUREAUS

When it comes to how a lender will report to the credit bureaus, I bring this to your attention as moral support in consumer efforts to NEGOTIATE, NEGOTIATE, NEGOTIATE.

Under the Hardship law, the Fair Credit Reporting Act clearly states that creditors are not required to report negative information to the credit bureaus..

There is more to the story, however. An August 13, 2008 Announcement from Fannie Mae & Freddie Mac clearly states that they place NO requirements on how lenders report mortgage default accounts to the credit bureaus. In response to the frequently asked question about how these items should appear on the credit report, the announcement stated:

“for reporting these actions on Fannie Mae loans, we require that servicers report to one of the major credit reporting agencies, but it is our policy

NOT to direct specifically how to report various actions.”

This is powerful and significant information. If the Fair Credit Reporting Act does not require lenders to report negative information at all, or in a specific manner, and the nation’s largest buyer of mortgage loans does not require lenders for report negative information at all, or in a specific manner, this leaves the door wide open for negotiating deletions or non-reporting of those items. So I reiterate: NEGOTIATE, NEGOTIATE, NEGOTIATE.

HOMEOWNER OPTIONS & HOW THEY AFFECT CREDIT SCORES

Foreclosure, Deed in Lieu of Foreclosure, Short Sale and Bankruptcy can all have longlasting impact on an individual’s taxes and ability to obtain credit. Homeowners need to get the facts before making critical decisions that will impact their lives for many years to come.

The following is a breakdown of homeowner options, and how each affects the credit scores. There are several loan products available, but as previously mentioned, Fannie Mae & Freddie Mac own or guarantee about half of the U.S’s mortgage market, so it is best to use their most recent Selling Guidelines as laid out in their June 25, 2008 Announcement.

Foreclosure

Foreclosure is the legal process by which a bank or other secured creditor either sells or repossesses a parcel of real property, home or land after the owner has failed to comply with the mortgage or deed of trust agreement with the lender. Most frequently, the violation of the mortgage agreement is the default of payment. The completion of the foreclosure process allows the lender to sell the property and keep the proceeds to pay off the mortgage as well as any legal costs. The length of the foreclosure process varies from state to state.

If the foreclosed property is sold for less than the remaining primary mortgage balance, and there is no insurance to cover the loss, the court overseeing the foreclosure process may enter a deficiency judgment against the borrower. Deficiency judgments can be used to place a lien on the borrower’s other personal property, obligating the borrower to repay the difference or suffer the loss of one’s property. It gives the lender a legal right to collect the remainder of debt out of the borrower’s other existing assets.

However, there are exceptions to this rule. If the mortgage is classified as “non-recourse debt”, then in the event of foreclosure of the borrower has no personal liability. This is often the case with residential mortgages. If so, the lender may not go after the borrower’s personal assets to recoup additional loss

(Note from Alice: Arizona is a non-recourse state, thanks to realtors, title companies and legislators fighting for it in court recently.)

The lender’s ability to pursue a deficiency judgment can be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans; however refinance loans and home equity lines of credit are not.

If the lender chooses not to pursue deficiency judgment – or can’t, because the mortgage is non-recourse – and writes off the loss, the borrower may have to pay income tax on the un-repaid amount even if it can be considered “forgiven debt”.

Any other loans taken out against the property being foreclosed (second mortgages, home equity lines of credit) are “wiped out” by foreclosure (in the sense that they are no longer attached to a property), but the borrower is still obligated to pay them off if they are not paid out of the foreclosure auction’s proceeds.

How Does a Foreclosure Affect Credit?

A foreclosure can be reported as a Foreclosure or Repossession and carries the most negative penalty on a credit score just under a public record (i.e. bankruptcy, tax lien, or judgment). There is a misconception that foreclosures are considered public records to the scoring system. However, they are not. Although there is a Public Notice Record on file once a foreclosure is started, this record is completely different than a credit report public record.

Unless a foreclosure becomes a public record such as a judgment, it can only be reported on a credit report for 7 ½ years from the date of the first late pay that lead to the foreclosure. Many consumers and lenders believe that it is 7 years from the completion date of the foreclosure process, but that is inaccurate. A foreclosure falls under the same rules as a collection, charge-off, or other similar action.

A foreclosure can drop credit scores from 50-250 points (this includes points already lost due to delinquent payments). The difference in point loss depends on how many points someone has to lose in the payment history factor of his or her credit report. Thus if someone has a 750 credit score and they opt to foreclose, their score could drop up to 250 points. However, if someone has a 500 credit score, them may only lose 50 points for the same derogatory.

If a deficiency judgment or tax lien is filed in connection with a foreclosure, credit scores can drop an additional 100 points.

How Long Before You Can Buy Another Home After Foreclosure?

The current guidelines form Fannie Mae & Freddie Mac state that the waiting period for a foreclosure proceeding, such as the subprime mortgage crisis fallout, loss of employment or a severe medical crisis, the waiting period, if approved, is 3 years from the date the foreclosure proceeding is completed.

In general: When it comes to foreclosure and how it affects the ability to obtain credit in the future, there are multiple points of extremely negative impact. Deficiency judgments for the amount not collected by the lender in the foreclosure sale can end up on a borrower’s credit report as a derogatory mark. Additionally there is the high risk that the borrower will be hit with a substantial tax penalty which can result in a tax lien which also appears on the credit report.

As a general rule, other than a bankruptcy, foreclosure is the least desirable of all of the options available when a borrower s upside down in a home mortgage.

Deed In Lieu of Foreclosure

One option to foreclosure is a “deed in lieu of foreclosure.” In this scenario the borrower turns the house over to the lender and walks away without owing anything. A deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The main advantage to the borrower is that is immediately releases him or her from most or all of the personal debt with the defaulted loan. The borrower also avoids a foreclosure proceeding and may receive more generous terms than he or she would obtain in a formal

foreclosure. Advantages to a lender include a reduction in the time and cost of repossessing the property.

In most instances, in order to be considered for a deed in lieu of foreclosure the total debt on the property should be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement offer must at least be equal to the fair market value of the property being turned over. Generally the lender will not proceed with a deed in lieu of foreclosure if the outstanding debt on the property exceeds the current fair market value of the property.

Because the agreement must be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer form the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parole evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.

Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached.

How Does A Deed In Lieu Of Foreclosure Affect The Borrower’s Credit?

Most lenders report a deed in lieu of foreclosure as a foreclosure, so the credit scores will carry the same serious effect if it were an actual foreclosure. However, borrowers can negotiate with the lender to report it differently in return for turning over the deed and avoiding foreclosure costs.

Many lenders will say that they cannot change the reporting status, but as you now realize, they can. Here are the credit reporting options in preferred order:

• Paid As Agreed – Credit scores will have already dropped over 100 points due to default in payments; however, if reported as Paid AS Agreed, the borrower will be able to purchase another home in a shorter period of time.

• Paid Settlement- Credit scores could drop up to 100 points in addition to the points already lost for delinquent payments.

• Foreclosure –See above.

How Long Before You Can Buy Another Home After Deed In Lieu Of Foreclosure?

The current guidelines from Fannie Mae & Freddie Mac state that the waiting period for a Deed in Lieu of Foreclosure is 4 years from the date the proceeding is completed.

If there are other extenuating circumstances that caused the borrower to have to enter into a Deed in Lieu of Foreclosure proceeding, the waiting period is 2 years from the date of the proceeding is completed.

Short Sale (aka: Pre-Foreclosure Sale)

The best option is a short sale, which occurs when a bank or mortgage lender to discount a loan balance due to an economic hardship on the part of the homeowner. The homeowner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

A short sale is typically executed to prevent a home foreclosure. Lenders often choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the homeowner, the advantages include avoidance of having a foreclosure on their credit history. Additionally, a short sale is typically faster and less expensive than a foreclosure.

How Does A Short Sale Affect The Borrower’s Credit?

In the wake of the devastating mortgage crisis of 2008, short sales are becoming extremely common. In fact, a backlog of cases has forced lenders to prioritize their caseloads. This largely means that homeowners have to be in default to get their attention. This is unfortunate, because late pays can cause serious drops in credit scores.

The good news is that borrower who chooses the short sale option show that they are exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property and to maintain a good relationship with that lender.

Most likely, the borrower or borrowers are unable to pay their current mortgage because they had an adjustable product and their mortgage payment doubled.

This type of situation doesn’t mean that they cannot afford a different loan program with a lower payment. Which leads me to wonder what the

incentive is for lenders to report short sales to the credit bureaus? All they would be doing is cutting off a pretty substantial future income stream if they put these types of borrowers out of the market for years. With this in mind, negotiation for non-report on short sales – and also the removal of late pays due to the lender not being able to process the sort sale fast enough – is well worth pursuing and is completely legal!

Here are the credit reporting options in preferred order:

• Paid As Agreed – Won’t hurt the score as long as the borrower has kept payments current.

• Unrated – May drop a few points.

• Paid Settlement – Credit scores will drop 50-150 points.

If reported as a paid settlement, the item will remain on the credit report for 7 ½ years from the date of the first late pay that led to the paid settlement.

How Long Before You Can Buy Another Home After A Short Sale?

The current guidelines from Fannie Mae & Freddie Mac state that the waiting period for a Short Sale is 2 years from the date the Short Sale proceeding is completed. There is no exception for extenuating circumstances.

The Mortgage Forgiveness Debt Relief Act of 2007

When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower; leaving it open to be taxed. However the Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties.

Bankruptcy Mortgage Relief

Currently, bankruptcy offers very limited protection to a homeowner who is upside down with his or her payments. The borrower can file a Chapter 7 which, depending on the state bankruptcy law, will most likely require him or her to surrender the property to the bankruptcy court, or file a Chapter 13 debt repayment plan to spread out prior delinquent payments over a number of months or years n the future. However, no bankruptcy proceeding can modify the terms of an existing home loan on a principal residence. Legislation is being proposed to Congress that would allow bankruptcy judges to modify the terms of an existing mortgage loan. I would not hold my breath. It could take years to make further substantial changes to the bankruptcy laws.

How Long Before You Can Buy Another Home After Bankruptcy?

The current guidelines from Fannie Mae & Freddie Mac state that the waiting period for a Chapter 7 Bankruptcy is 4 years from either the dismissal or discharge date. The exception for extenuating circumstances is 2 years.

The current guidelines state that the waiting period for a Chapter 13 Bankruptcy is 2 years from either the dismissal or discharge date. There are no exceptions for extenuating circumstances.

In the case of multiple bankruptcies, the current guidelines state that the waiting period is 5 years from the most recent discharge or dismissal date. The exception for extenuating circumstances is 3 years from the most recent discharge or dismissal date. The exception for extenuating circumstances in the case of multiple bankruptcies is a 3 year waiting period from the most recent discharge or dismissal date.

Credit Tip

If you are facing a foreclosure, short sale or bankruptcy due to circumstances of losing a job, a medical crisis, the subprime mortgage crisis fallout, I suggest that you fully document your experience – starting now. It’s not recommended to wait until later, because, if you decide to apply for a loan in two years based on an extenuating circumstance claim, the details and emotional energy of what you are going through will be more difficult to document and prove down the road.

There Is Good News!

• Aging Out: In all instances above where I reference how many points will be lost in each scenario, it is important to understand that over time all derogatory accounts age out. This means that the older the account, the less it will hurt yourcredit scores.

• 7-Year Reporting Period: The law states that derogatory items “can be” reported for 7-10 years. It doesn’t state that they “MUST BE.” My experience proves over and over again that there is no need to wait out the 7 years. You don’t have to. You can start seeking early removal of the item by disputing to the credit bureaus that are reporting it. In many instances, the item will be deleted after 3-4 years.

Which Is The Best Choice To Protect Credit Scores?

Each of the scenarios I have presented in this chapter has a specific impact on credit scores, but it’s important that each individual understands that this is a very personal decision. A borrower must weigh the impact such a critical decision will have on family, employment, and future financial stability.

But above all, consumers should not be afraid to ask questions and find out what options are available. Many consumers mistakenly assume that there are specific laws and policies set in place that govern the actions of lenders, creditors, and credit bureaus.

However, in many instances they are in the gray as much as the consumer. So

homeowners should not feel intimidated by them. If a plan sounds so logical then the borrower should do the research, lay out the plan, and present it to the lender. With so many Americans in trouble, this is a time when real solutions are necessary to our economy. By creating solutions, there is a chance we can bring about changes in legislation that can help millions of consumers.

THE REAL DEAL

Over many years in the credit business I’ve seem much devastation to credit scores, the result of economic crisis. I have never witnessed such a dramatic impact across a wide cross-section of people as with the current mortgage debacle. It is trying the hearts, minds, and financial futures of literally millions of individuals who have abandoned their last hope of salvaging their home ownership and now fight to save their credit. They are strong, and they will overcome this struggle because they are proactive; they are wise, and they know that they can take steps to mitigate the damage and recover to come back stronger than ever.

My advice to any homeowner on the verge of foreclosure is, first and foremost, find out what options are available. Do the research. Consult the experts. Gather as much information as possible, and weigh the pros and cos. What may seem to be in the best answer right now may also have a serous impact for many years to come, so make an educated decision.

The great news is that whatever decision you make, whatever fate falls upon your credit scores right now, you can start improving your situation immediately.

You can start recovering and rebuilding immediately. This book provides

dozens of tips and tools to help you rebuild credit. For the most up-to-date

information for recovering in the current credit market, please visit my website,

http://www.lindaferrari.com.