Homeowners who have negotiated short sales may be at risk of a more negative impact to their credit rating than they expected. An investigation revealed that the current credit scoring system does not have separate codes that distinguish foreclosure from short sale. Although both cases are serious negative credit events, the financial loss that results from a foreclosure is generally larger than the loss that occurs as a result of a short sale.

Fannie Mae, Freddie Mac, and the Federal Housing Administration, the main sources of housing financing in the US, all distinguish between short sale and foreclosure. These entities may not qualify a consumer for a new mortgage for up to seven years if he or she has a reported foreclosure. However, people whose credit reports reflect a short sale may qualify for a new mortgage in as little as two years depending on recent positive credit behavior and funds available for a down payment. However, lenders who do not recognize the difference between short sale and foreclosure may refuse mortgages to consumers with past short sales who are otherwise qualified.

Senator Bill Nelson requested the FTC and CFPB to investigate the issue of misidentifying short sales as foreclosures. He requested that those who follow the erroneous coding practice be punished if the coding problem is not fixed within 90 days. The Senator expressed his concern that with the large number of short sales that have taken place in recent years, blocking qualified buyers from reentry into the housing market stifles economic recovery.

With higher unemployment rates still in place, many people still find themselves behind on their mortgage and facing the possibility of short sale or foreclosure. The fear of losing a home to foreclosure may add to the stress of being unemployed. Having the advice and expertise of a lawyer who specializes in bankruptcy law can possibly benefit people who struggle with excessive debt and are at risk of losing their home.

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