Are you an Arizona short sale seller whose short sale has been classified as a foreclosure on the credit reporting system? If you did short sale Arizona, there’s good news for you! A new code is about to be launched in the current credit reporting system which will ensure that the short sales and foreclosures will not be lumped together. It may help many short sale sellers to qualify for new mortgages earlier that the 4 to 7 years required in a foreclosure.
 
Part of the reason you probably chose to go through the short sale process in Arizona was to minimize the damage on your credit. Even on the approval letter, it may say how it is going to be reported on your credit. Things don’t always work out that smoothly, though. (Really, a bank fudging up on details? You don’t say…) But, it looks like they’re trying to get their act together.
 
According to the trade group behind the three national credit bureaus (TransUnion, Equifax, Experian), Consumer Data Industry Association (CDIA), and similar credit information agencies, a new code is developed to differentiate between short sales and foreclosures and specifically list them in the credit report of the consumers. This code will pass through the operational testing period before being fully implemented. After testing, this code will be made available to all the agencies associated with credit behavior of the consumers as per the three bureaus.
 
Why is it so important to change the current coding system? The reason to do so is to develop a uniform way for creditors so that they can inform the three national bureaus about the involvement of a homeowner in a short sale.
 
Why New Short Sale Code is Important
 
As mentioned by the CDIA, the lenders have the ways to inform about a credit obligation where a deal was closed for less than the remaining amount. However, with the involvement of a mortgage, it was often considered as a foreclosure instead.
 
The officials have highlighted another scenario, which includes the increase in the number of short sales in the past few years. The Metro 2 reporting system operated by the CDIA was not designed or upgraded to handle these transactions in such a high number where the lender was ready to accept a partial amount for the property rather than the complete mortgage balance and close the deal with a new purchaser instead of going for a foreclosure.
The issue was worsened by the lack of any inbuilt capability to recognize short sales in the major underwriting systems used by Fannie Mae and Freddie Mac. As an output of this major technical glitch, millions of the house owners are denied a new mortgage because of a foreclosure shown in their credit reports despite of being involved in a short sale.
 
According to the current rules of Fannie Mae and Freddie Mac, an applicant with a foreclosure in his credit history is not eligible for any mortgage for the next seven years. On the contrary, people with short sales in their credit report might be eligible for the same after several years if they are diligent in their credit card payments, other loan obligations, and have sufficient fund for making the down payment.
 
The credit experts are often calling this technical glitch a scandal. Further, it is a worrying situation for the people who are eligible for a mortgage and are looking to start all over again.
 
U.S. Sen. Bill Nelson (D-Fla.) urged the Consumer Financial Protection Bureau and the Federal Trade Commission to find out why credit bureaus and creditors continue to misread short sales and hence, blocking consumers from re-entering into the housing industry. It will certainly have a drastic effect on the economy by restricting the improvement in the housing industry.
 
When does the new Short Sale Code system start?
 
How long will it take to get this code operational? The CDIA has promised its implementation after the completion of the testing period. The rest depends upon the mortgage providers and the time they would require upgrading their systems and train the personnel accordingly. Without anyone pushing the complete operation, it might take up to a year for Fannie Mae and Freddie Mac to upgrade their systems. However, with the increasing pressure from different agencies, the change might happen a lot quicker than expected.
 
Tracy (G+) is an Arizona Short Sale Realtor, Investor, Rehabber, and Foreclosure Expert.
 
She also is an avid blogger, vlogger, contributor to the Bigger Pockets Blog, and consultant on all things Arizona Foreclosures.