When homeowners are faced with the reality of no longer being able to afford their home, they often face a crossroads on whether they should obtain a loan modification with a lower payment or do a short sale.
Let’s look at some information on each:
Loan Modifications:
The goal of a loan modification is to reduce a homeowner’s mortgage payments and make them more affordable. This is accomplished by implementing one or more of the following:
- Lowering the interest rate.
- Extending the term of the loan.
- Adding unpaid interest to the principal balance.
- Reducing the principal balance.
Keep in mind very few loan modifications ever get approved. And many homeowners use a loan modification as a way of delaying foreclosure.
As described on our loan modification page there are many different types of loan modifications. Some are private modifications that the banks offer and HAMP (Home Affordable Modification Program). Another form of a loan modification that you need to be aware of is a temporary or trial loan modification. Many lenders require borrowers to make three payments in order to “show good faith” and then they deny them for a permanent modification once the trial is complete. To make matters worse the lenders report these decreased payments to credit bureaus.
However, at the end of the term, the bank is also free to say even though you made your payments on time, your loan is now in default. You must pay the bank the difference between the amount of the modified payments you’ve made for the past 3 to 6 months and your regular mortgage payments or you will get foreclosed on.
This DOES HAPPEN all the time. In fact the Massachusetts Attorney General sued the 5 big banks on Dec. 1 2011 over this very issue.
Remember even if you do receive a loan modification and can afford the new lower payment this probably will not solve your long term problem. It also doesn’t help that your home is worth less than what you owe. In fact it makes your home MORE upside down.
Short Sale:
The goal of a short sale is to sell the home for less than the mortgage balance and convince the bank(s) to forgive the difference (deficiency balance).
In many cases a short sale is only considered after the loan modification fails, which we don’t recommend. More homeowners need to consider a short sale at the start or before default. Short sales provide a way to sell your home and get on with your life debt free.
Here are other short sale factors to consider:
- One of the biggest benefits with a short sale is the forgiveness of all debt.
- After 2 to 3 years of maintaining credit you will be able to qualify to buy another home after a short sale vs. 4 to 7 years through foreclosure.
- A short sale does not negatively affect your credit as badly as a foreclosure.
- With a short sale you are able to sell your home responsibly and move on with your life.
- Many lenders are now paying distressed homeowners financial incentives to do short sales of anywhere between $3,000 and $35,000.
Having worked with distressed homeowners since 2006 we have noticed too many borrowers getting too caught up in trying to keep their home, or “fighting for their home” as many call it.
Most of the time this is the wrong way to think because THE HOUSE IS THE PROBLEM as it is sinking you!
We have had hundreds of distressed homeowners come to us for a short sale after trying for over a year of trying to receive a loan modification. They are always so burnt out and sometimes simply hate their bank. Then we help them with a short sale and they end up saying “wow we should have done this two years ago.”
Watch our video on Why a Short Sale is Usually Better Than a Loan Modification
