By Riekie Karstens
A loan officer submits a mortgage application for approval from the automated underwriting system, which is used in the mortgage industry to quickly separate the wheat from the chaff to determine whether applicants qualify for a mortgage. A secret code separates the wheat from the chaff in the loan approval process.
Creditors and credit bureaus communicate via a network. Credit bureaus use codes to provide information about the consumer’s financial profile to the creditor. Amongst the many codes, one can find the Score Factor Code 22 used by the credit bureaus. It is not really a secret code, but few people know or understand what this code means and how it is used.
Short sales, deed-in lieu of mortgages, late mortgage payments, bankruptcies and foreclosures all qualify as a score factor for Code 22. These days the credit score is no longer solely the issue to qualify for a mortgage, but rather the way the mortgage underwriter “sees” the credit.
The consensus among lenders is that one can buy a home faster if you sell your present troubled mortgage as a short sale rather than a foreclosure. Fannie Mae approves mortgage buyers who have suffered through extenuating financial hardships after 24 months following a short sale, a bankruptcy discharge or a foreclosure.
However, the lender’s treatment on each seems to be equal. There is a 20% down payment and a 660 FICO (credit) score required. After a person went through a short sale, it will be hard to save a 20% down payment 24 months later.
FHA permits people to obtain a mortgage within 36 months of a bankruptcy discharge, foreclosure or a short sale. The treatment here is equal to all the Score Factor Code 22 entries made. It will be difficult for a person to go through a short sale, foreclosure or a bankruptcy and save 20% in the next 24 months and reestablish their credit to 660.
Fannie Mae and Freddie Mac are now indicating that they will have new guidelines for people who have had a foreclosure or short sale. Again, the Score Factor Code 22 treats both processes in the same light.
Fannie Mae’s new guidelines:
• Will now prohibit foreclosed borrowers form getting another mortgage through the giant investor for five years;
• If there are “documented extenuating circumstances” the mortgage prohibition is for three years;
• After five years, borrowers with foreclosures in their files will have to put at least 10% down and need a FICO score of 680.
Freddie Mac’s new guidelines:
• Will now prohibit foreclosed borrowers from getting another mortgage for 7 years;
• The company claims they will “aggressively pursue walk-aways to preserve their deficiency rights” where permitted by state law.
Keep in mind the FICO score has two aspects that can have an impact on one’s ability to obtain a mortgage. These are the scores that separate the wheat from the chaff. Whether it is fair or not, there is a FICO score and there is a Score Factor Code 22.