How To Quickly Restore Credit Following A Short Sale or Foreclosure

It should be no surprise that a short sale or foreclosure negatively impacts a borrower’s credit score.  In fact, in many cases, a borrower with a completed short sale or foreclosure may have to wait two to seven years before qualifying for FHA or conventional financing.  Due to today’s historic-low interest rates, that waiting period might cost a borrower in excess of $100,000.[1]  Fortunately, many borrowers who completed a short sale or foreclosure in Arizona have legal options to quickly restore their credit.

Short Sale and Foreclosure Seasoning Periods

As of the date of this article, a borrower with a short sale must wait anywhere between two to four years before qualifying for a conventional mortgage.  On the other hand, a borrower with a completed foreclosure must wait up to seven years before qualifying for conventional financing.

A borrower with a completed short sale can qualify for FHA financing within three years following the date of the completed short sale.

As of May 30, 2013, the fixed rate for a 30-year mortgage is 3.81% [2]; interest rates are not likely to be this low again in our lifetime.  Thus, if a borrower has to endure a two to four year seasoning period before qualifying for conventional financing, the prime rate of interest two to four years from now will certainly far exceed 3.81%.  As demonstrated in the footnote below, that waiting period could be costly.

Solution to Quickly Restore Credit

Many Arizona homeowners have options to quickly restore their credit following the completion of a short sale or foreclosure.  As most by now are aware, Arizona is an “anti-deficiency” State.  This means that Arizona has laws that protect borrowers from defaulting on a mortgage, and then being sued by their lender for any deficiency following a foreclosure or short sale. See A.R.S. §§ 33-729 and 33-814(g).  Furthermore, pursuant to the Arizona Supreme Court, if the anti-deficiency statute applies, then a borrower has “no personal liability” regarding the loan. Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988).

Thus, if a borrower is not personally liable for a loan, then it is inaccurate for a lender or the credit reporting agencies to report the short sale or foreclosure to the credit reporting agencies as anything other than “paid as agreed.”  Similarly, if the loan is non-recourse and the borrower is not personally liable for the loan, then it is inaccurate to report any late fees to the credit reporting agencies regarding the loan.

Consequently, borrowers should insist (as a term of settlement in any short sale transaction) that the lender agree, prior to the close of escrow on the short sale, to report the loan as “paid as agreed,” and to remove any reference to any late payments.

Step-By-Step Approach to Restore Credit Following Short Sale

However, if a short sale has already closed escrow and a lender reports the loan to the credit reporting agencies as anything other than “paid as agreed,” then the borrower can follow the below step-by-step approach to quickly restore their credit:

  1. Obtain a current copy of the borrower’s credit report from one of the “Big Three” credit bureaus:  Experian, Transunion, or Equifax.
  1. Identify all derogatory remarks on the credit report regarding the subject loan (e.g., late payments and negative notations such as “account settled for less than agreed”)
  1. File an online dispute with one of the “Big Three” credit bureaus.  The borrower should expressly dispute all late payments and any disputed negative notations.
  1. Pursuant to the Fair Credit Reporting Act, the borrower must then wait 31 days following the filing of the online dispute. After the expiration of 31 days, the borrower should obtain a new copy of their credit report to confirm if the disputed remarks have been corrected.
  1. If the disputed remarks are not removed, then the borrower can prosecute a civil lawsuit against their lender for declaratory judgment and violation of the Fair Credit Reporting Act, 15 U.S.C. §§1681 – 1681x.

After filing the lawsuit, pursuant to the Declaratory Judgment Act, the court can issue its order compelling the lender and the credit reporting agencies to correct the derogatory reporting of the loan.  In addition, pursuant to the Fair Credit Reporting Act, the court can issue an award of actual damages sustained by the borrower because of the derogatory credit reporting (costs and attorneys’ fees are also recoverable). 15 U.S.C. §1681o(a).

Moreover, if the violation was willful, the borrower is entitled to statutory damages for each separate violation and punitive damages as the court will allow. 15 U.S.C. §1681n(a).

In today’s world, a reputable credit score is a valuable asset worth protecting.  For more information on credit scores and the Fair Credit Reporting Act, please call our office today to schedule a consultation with Mr. Charles.

[1] For example, the cost of interest for a 30–year, $200,000 mortgage with a fixed rate of 3.81% APR is  $135,899.29, over a 30-year term.  Conversely, the cost of interest for the same mortgage with a fixed rate of 8.0% APR is $328,310.49, over the same 30-year term.  Thus, the borrower will save $192,411.20 by securing the fixed rate of 3.81% APR, now.

[2] See Freddie Mac’s Weekly Primary Mortgage Market Survey at http://www.freddiemac.com/pmms/

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