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The foreclosure that never was

By Jay MacDonald ·
Monday, March 14, 2011
Posted: 10 am ET

You know the old saying, "A rising tide lifts all boats?" Well, apparently the reverse is also true, at least for some property owners who opted for a short sale to avoid foreclosure. Through no fault of their own, their credit report now includes a foreclosure that never was.

You've heard this litany before: When the housing market fell, many who owned homes or income property found themselves upside-down, as in they owed more on their mortgage loan than the home was worth due to plummeting housing values.

The solution for those without other options was unpleasant but obvious: short-sell the place, take your loss and move on.

Just one catch: when these same short-sellers applied for a mortgage loan to purchase another property, they found that their bank had reported their short sale as a foreclosure.

Is it tough to get a loan when you've got a foreclosure on your record? Would Charlie Sheen make a terrible therapist?

As Bankrate's Real Estate Adviser Steve McLinden notes, a short sale could ding your credit score by 100 points and take two years to repair, while a foreclosure can drop it 280 points with a five-year repair window.

Whaddya gonna do?

First, if you're just lining up your short sale, request a letter from your mortgage lender that states how the account will be reported to the credit bureaus. An account labeled "paid in full" or "legally paid in full for less than full balance" will reassure future lenders while "foreclosed" assuredly will not.

If you only discovered this important error after the fact, contact your lender and the three major credit bureaus – Equifax, Experian and TransUnion – to make sure they correct the mistake. And as a precaution, be sure to monitor your credit report annually to make sure this error doesn't return to haunt you.

Ever found yourself with a ghost foreclosure on your record? Were your efforts to correct the error successful?

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They Shouldn’t be Allowed
May 02, 2011 at 1:29 am

My wife and I both moved from the house that we bought in 1987 to save it from foreclosure. We did noy want to sell the house, as we had always planned to leave it to our two sons one day. I had been forced to transfer (or find another job) to Philly, so my wife found a teaching position in the Washington, DC area to be close enough for me to drive "home" every weekend to see our kids. Because of the ridiculous rental costs in DC, all her income went to her rent, utilities and the raising of two teenage boys, while I rented a room in Philly so I could pay both my living expenses and that mortgage payment. We had never refinanced or taken any equity from the house, which would have been paid off in 2017, but due to my wife's cancer diagnosis and treatment 18 months ago, she was unable to work for several months and we got behind on our mortgage. We attended a huge bank-sponsored "save your home" gathering when we were behind by just 2 months...and they all but promised that they could simply add those months to the end of the contract...and that started a 10 month battle to obtain a workout that never came. On the day they sold our house on the courthouse steps to a 3rd party investor, the principal balance was only $54K on a house worth over $160K. The house sold for $90K that day (and a year later they still have not returned the surplus funds). It seems to me that this should not have been labeled a foreclosure due to the fact that they got all of their money and then some (as the legal fees and accrued interest increased the balance due to $60K). Is there anything I can do to minimize this destruction of our credit scores? Or to force them to return the $30K they owe to us? The bank lost nothing...and we lost everything...and now we have no hope of buying another home anytime soon...most likely never, as we are both nearing retirement age.

April 30, 2011 at 5:23 am

Tired of Whining, I agree with you totally. However please don't forget that banks were climbing over each other to throw money at borrowers. Everyone from realtors, appraisers and banks were willing to allow the inflation of housing prices.

When I built my house I had nearly $70,000 in equity at closing. Now three years later I am 100K underwater! So please don't tell me I over extended myself. I busted my rear to get a better job and keep up. I'm now overseas still paying my mortgage and living in a dump to make sure I'm keeping up. But not everyone has been as lucky as me. Thankfully my small town bank has been flexible with me and allowing me a three year reduction in interest so I can pay down my balance faster.

In short, the banks were just as responsible as the over ambitious borrower. The banks therefore have a responsibility of working through the aftermath.

Tired of the Whining
April 19, 2011 at 9:02 pm

So sorry to be blunt. But why should a homeowner stick the bank and the US public with THEIR overpurchasing and still get to keep their credit rating? Where is personal responsibility for one's just and lawful debts? As between the bank and the borrower, the loss SHOULD be borne by the Borrower who (a) chose the property (b) decided how much to pay for the property, and(c) over leveraged the property beyond their means. Too many Borrowers are walking away from their properties expecting the Bank who loaned them funds in good faith to take their loss and move on. A short sale IS the equivalent to a foreclosure....the Bank basically accepted less for the loan as a convenience to the Borrower and to cut its losses. To show the loan as "paid as agreed" would mislead other creditors into doing business with folks who DID NOT PAY THEIR LOAN as agreed.

Monica Rockwell
March 26, 2011 at 4:02 pm

I am making my second attempt in the last 6 months to refinance an existing mortgage. The process and requirements are in disarray leaving everyone, not least of all the borrower, confused. The first time around, the lender made a serious error in the truth in lending disclosure and it wasn't until closing time that "surprise, you'll need $30,000 at closing." The second time around, the appraisal on my home miraculously dropped 10% after only a few months. Then, on the morning we were scheduled to close I got a call that the closing couldn't take place until further review by the underwriter. The underwriter proceeded to keep moving the bar to close with more and more not only document requests but ended up pressuring me into taking out a loan on my vehicle (which I didn't want) to use as funds at the closing when I had offered to use funds from my business. They also seemed unfamiliar with reading a property tax bill and called me one day at work insisting that I drop everything and call American Express to get the current balance on my account. The whole process has left me bitter. No wonder houses aren't selling and home prices are continuing to fall. The banks got a bailout, so start lending and clarify what is required so that everyone is on the same page and the borrower isn't harassed.