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 each option:
The goal of a loan modification is to reduce a homeowner’s mortgage payments and make them more affordable. They are a fantastic option for those who have temporary hardships for less than a couple of years. If your hardship is a permanent one then a loan modification is probably not the right option for you.
Loan Modifications are accomplished by the bank agreeing to at least one of the following:
- Lowering the interest rate
- Extending the term of the loan
- Adding unpaid interest to the principal balance
- Reducing the principal balance, otherwise known as a principal reduction
When we first started hearing about loan modifications back in 2009 almost no one was getting approved for them. A 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. This actually happened so often that in 2011 the Massachusetts Attorney General sued the five big banks over this very issue. So if you do go for a loan modification just keep all of this in mind.
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). 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 of 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.
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.”