We’ve talked on this blog before about the effect of a foreclosure vs. short sale on a consumer’s credit history. Unfortunately, a lot of homeowners have been getting punished for short selling by having an ambiguous black mark on their credit report. According to Ken Harney at, the way loans are closed out in a pre-foreclosure sale can look pretty much the same as an actual foreclosure.

Why the Confusion?

The “settled for less than the full amount” terminology makes it sound like the seller had their house seized by the bank. Lenders and underwriters would have to actually sit down with a prospective borrower and get the whole story to know the difference. With so much automation in the mortgage industry these days, that doesn’t always happen.

If you’ve ever tried to fill out an online form where your information doesn’t fit in all the neat little check boxes, you can imagine how difficult it is to get approved for a new loan after a short sale. Previous homeowners who have rebuilt their credit record for a few years may still be turned down because they are lumped in with borrowers who have a foreclosure on their record. They should be able to get a loan in about three years after a short sale if they are current on all their financial obligations. Instead, they could keep getting rejected for as long as seven years.

Lenders Are Ready to Change

Now, the Consumer Data Industry Association along with the three credit bureaus and major lending institutions are coming together to fix this problem. Since short sales have gone from being uncommon to incredibly frequent in just a few short years, it’s high time to add a code that designates a forgiven mortgage balance or negotiated settlement as short-sale related. This will give mortgage underwriters and lenders a faster way to assess actual risk rather than assuming the worst. A new code is in the works now but won’t be in widespread use until it goes through “beta testing”. In the meantime, borrowers who have a short sale on their record may have to jump through some additional hoops to get approved and get back in a house.