11-18-2010 11:50 PM
15 months ago, I sold an investment property on a short sale. The short amount was ~$46k. In order to get the lender to agree to the short sale, I agreed to a no interest, no payment promissory note for $22.5 secured by a subordinated lien on my primary residence that is due on sale of the house. The bank agreed that the remaining amount would be forgiven and put it in writing.
I am trying to refinance my primary residence now. My credit score are all between 690 and 699. 700 is a difference of 3/8 on the mortgage rate. In looking at my credit report, it shows the original mortgage with a status of "Bad Debt/Collection" with a balance of $46k and the promissory note is not reported at all. Does it seem like this is being reported correctly? Shouldn't the original show as paid or settled or something along those lines and/or at least have a $0 balance? If I dispute it and it gets updated, even just to $0 balance, could it change my score enough to get me above the 700 level, or even better the 740 level? It was over 800 before this whole ordeal and I have never had a late payment other than that property.
11-19-2010 08:16 AM
It sounds like it is reported correctly.
The loan was closed for less than owed.
The fact that you made some arrangements to pay the difference over time, does not affect that the loan closed as a short sale with 46K owed.
They are under no guidelines to report the promissory note and I do not think there is any way for them to do so. It is not a loan or any type of commerical product, it is a defered payment agreement on a defualted loan that they are being nice and allowing you to pay off at 0 interest whenever you sell the main property.
So, I do not think anything can happen to make this better for you.
You do understand that they are going to have to pay off the promissory note to do the refi correct...The bank would have to agree to re-subordinate the promissory note on the new home or be paid off. It may be a tough sell to get them to subordinate the loan again if you have the equity now to refi and pay them off.
11-19-2010 09:22 AM
Is your loan officer aware you had a short sale?
Fannie Mae requires you to wait a minimum of 2 years after the short sale in order to be eligible for their loan programs.
If you were late on the mortgage before/leading up to the short sale, Freddie Mac programs will likely require you to also wait 2 years, as they don't currently have a credit policy relating to short sales but instead consider it a "significant derogatory event" which almost always requires 2 years to elapse from the event. If you were not late on the mortgage leading up to the short sale, then you'd be eligible for Freddie Mac mortgages now. However come February 1st 2011 Freddie Mac is considering any short sale as a significant derogatory event, even if all payments were made on time, and will be mandating either a 2 year (if caused by financial mismanagement) or 4 year (if due to extenuating circumstances) waiting requirement.
11-19-2010 10:22 AM
Thanks for the replies. I am aware of all of the subordination issues, rules related to serious delinquencies, and various other re-fi issues. My questions are really just in regards to the credit score and report. I will try to clarify a few things that I typed in my middle of night, insomnia induced original post.
I probably mis-spoke when I said promissory note. I worked with a lawyer who specializes in short sales when all of this was done. During the negotiation, an unsecured promissory note was discussed but the terms were infinitely more favorable by securing it with a lien. What I actually signed was a new, subordinated mortgage note for 22.5k, 0% interest, 0 payments, due upon sale of the primary residence. In exchange, the bank completed and provided documentation that essentially states that the mortgage on the property sold short would be considered settled/closed and that they could/would not ever attempt to collect anything further related to that mortgage.
Based on all of that, I have no issue with them reporting it as a.charge-off or bad debt since it was. My concerns are that the status shows as "Bad Debt/Collection" and shows a balance of $46k. Shouldn't the status now be "Settled" or something that still properly identifies it but also reflects that it is completely closed out? Additionally, and I think maybe more importantly, shouldn't that balance show as 0? The other question is, does it even matter? Would reflecting it as settled/closed and having the balance changed to $0 even have an impact on my credit score? I would be inclined to think it should.
11-19-2010 11:00 AM
Did the mortgage companies letter state that with the acceptance of the $22.5k mortgage note that they'd consider the old mortgage paid in full? "Settled" seems to insinuate that, but I'm a mortgage expert, not a legal expert.
Your question is almost a better question for the general credit section since the mortgage section primarily discusses mortgage qualification guidelines.
However even if it reports as a $0 balance, I don't think it'll improve your scores, as long as it still reports as a collection. If you were to get it switched to a non-delinquent account with a $0 balance (or without a $0 balance) I'd think then it'd improve your scores.
11-19-2010 12:44 PM
Bad debt or collection does not help your score whether it shows paid or unpaid so getting the balance updated will not help your score and would likely update date of last activity which would actually hurt your score most likely.
You may have a big issue here. Lenders will have to know about the subordinate loan. If that loan is due to a deficiency on the 46K, there are going to be real issues with the lender saying that has to be taen care of. Typically any debt like that would be required paid off or settled. You currently have a payment arrangement on it due upon sale of the property. Unfortunately, underwriting quilte possibly will still look at it like any other unpaid debt/collection. Your agrement that they do not come after you is based on you paying off that 22K loan which you have not done so the debt is neither paid or settles, but deferred. This is a substancial risk to the new lender. Typically stuff like this they will require paid. SO unless you are planning on pulling out the 22K to pay it off this could be a big hurdle. Yeah, they may just allow the lender to resubordinate (if the lender will agree to which is a big if), but they may not.
All that is outside of the fact that you still need to meet the minimum time periods for short sale which under most programs is at least 2 years.
I would be careful about making sure that any info your LO is giving you about approval is getting vetted by an UW before I went too far into this. IT is sounding pretty sketchy. Bottom line is that getting a refi less than 2 years after a short sale is tough. Doing so when the short sale was an investment property is even tougher since they give alot more "credit" to people who lost or had to short sale primary residences due to job losses, etc than people who were investing). Doing so when still holding a 22K deferred debt on the short sale without paying that off is going to be even harder.
All that said, good luck with it. As Shane said, unless they are going to change the old mortgage to say paid as agreed nothing else is going to help your score and the 46K being reported is accurate. Again, your agreement has yet to be fullfilled so they are 100% accurate to still report the deficiency still. The only thing you have is an agreement from them to not come after you for that money.
11-19-2010 12:46 PM
I also noted you said there were late payment on that property correct? or are you just referring to the short sale. If you had late payments, how many, how late (30, 60, 90, 120 days) and when was the most recent lat payment?
11-20-2010 05:09 AM
Even if you raise your score above 700, your "subordinated note" may prevent refinancing the primary mortgage. Noramally when you pay off the first lien, all others "move up". Unless you have contract languauge forcing the lender on the subordinated note to subordinate in a refinancing, They can use this as leverage to make you pay them off when you refinance.
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