Loan Modification or Short Sale - What is Best for You?
- By Julie Fontaine
- Published 06/15/2009
- Selling
- Unrated
When a homeowner is faced with an unaffordable mortgage payment two principal choices exist for the homeowner in today's market (apart from foreclosure):
Option 1: Loan Modification
Option 2: Short Sale
Which is best for you?
Is a loan modification for you?
A loan modification is best for homeowners that have a temporary financial hardship or have an adjustable rate loan, finding themselves unable to make the loan payments under current terms of the loan. A loan modification focuses on changing the interest rate or length of the terms of the loan (extending it up to 40 years) to make the current loan more affordable.
Reduction in the amount that is owed rarely occurs. So if you are upside down in your mortgage - you will remain so. In high foreclosure states such as California, Nevada, and Florida which have experienced a significant price drop, homeowners may find themselves with negative equity that may take years to recover. A loan modification will not solve this problem, and may be forced to do a short sale anyways if they need to sell in the future. There are some significant drawbacks as well to loan modifications, so choose carefully before you pursue this approach.
Loan Modifications:
1.53% of all loan modifications fail after 6 months
2.Strict qualifications may not make you eligible
3.Most loan modification companies charge money and offer no guarantees
4.You will remain upside down on your mortgage if you currently have no equity
5.Interest rates are fixed for only 5 years - subject to future inflationary rates
6.33% of all loan modifications result in HIGHER payments
7.May or may not result in reduced interest rate and loan terms
Is a short sale
for you?
The short sale of a home is most appropriate if the home is truly doesn't make sense to keep, with either unaffordable payments, or significant negative equity. A home bought in San Diego, California in 2005 for $500,000 is only worth $300,000 today. Job loss, reduction of income, illness, divorce, or just a bad loan, are all valid reasons that homeowners are selling today. When the house is worth less than the mortgage balance, the sale of the home will not pay off the existing debt. One of two scenarios must happen: 1) The homeowner comes out of pocket to pay the shortfall amount for the existing debt to be fulfilled/extinguished or 2) The existing mortgage holder (bank) agrees to take a loss on their debt to allow the home to be sold (granting a short payoff).
With the high negative equity situations, banks are electing to grant the short sale to sell the house. The banks are not required to do this -their other choice when homeowners have stopped paying them, is to foreclose. Ultimately if the financial numbers work, it is cheaper for a bank to short sale rather than foreclose.
Why a Short Sale?
1.Enables the sale of the house without money coming out of pocket for closing
2.Allows for financial recovery during the short sale process
3.Releases you from your negative equity (upside down) position
4.Capitalizes on the bank's current motivation to grant a short sale
5.May forgive taxes owed from the short sale
6.Provides quicker credit recovery
7.May allow you to buy another home at today's bargain prices!
Closing Short Sales can be tricky - banks don't make it easy. Most successful short sale are done using a team of real estate experts, but most importantly, a professional bank negotiator should be on the team. Nine out of ten unsuccessful short sales (ending in foreclosure) generally are real estate agents trying to negotiate their own deals.
Option 1: Loan Modification
Option 2: Short Sale
Which is best for you?
Is a loan modification for you?
A loan modification is best for homeowners that have a temporary financial hardship or have an adjustable rate loan, finding themselves unable to make the loan payments under current terms of the loan. A loan modification focuses on changing the interest rate or length of the terms of the loan (extending it up to 40 years) to make the current loan more affordable.
Reduction in the amount that is owed rarely occurs. So if you are upside down in your mortgage - you will remain so. In high foreclosure states such as California, Nevada, and Florida which have experienced a significant price drop, homeowners may find themselves with negative equity that may take years to recover. A loan modification will not solve this problem, and may be forced to do a short sale anyways if they need to sell in the future. There are some significant drawbacks as well to loan modifications, so choose carefully before you pursue this approach.
Loan Modifications:
1.53% of all loan modifications fail after 6 months
2.Strict qualifications may not make you eligible
3.Most loan modification companies charge money and offer no guarantees
4.You will remain upside down on your mortgage if you currently have no equity
5.Interest rates are fixed for only 5 years - subject to future inflationary rates
6.33% of all loan modifications result in HIGHER payments
7.May or may not result in reduced interest rate and loan terms
Is a short sale
The short sale of a home is most appropriate if the home is truly doesn't make sense to keep, with either unaffordable payments, or significant negative equity. A home bought in San Diego, California in 2005 for $500,000 is only worth $300,000 today. Job loss, reduction of income, illness, divorce, or just a bad loan, are all valid reasons that homeowners are selling today. When the house is worth less than the mortgage balance, the sale of the home will not pay off the existing debt. One of two scenarios must happen: 1) The homeowner comes out of pocket to pay the shortfall amount for the existing debt to be fulfilled/extinguished or 2) The existing mortgage holder (bank) agrees to take a loss on their debt to allow the home to be sold (granting a short payoff).
With the high negative equity situations, banks are electing to grant the short sale to sell the house. The banks are not required to do this -their other choice when homeowners have stopped paying them, is to foreclose. Ultimately if the financial numbers work, it is cheaper for a bank to short sale rather than foreclose.
Why a Short Sale?
1.Enables the sale of the house without money coming out of pocket for closing
2.Allows for financial recovery during the short sale process
3.Releases you from your negative equity (upside down) position
4.Capitalizes on the bank's current motivation to grant a short sale
5.May forgive taxes owed from the short sale
6.Provides quicker credit recovery
7.May allow you to buy another home at today's bargain prices!
Closing Short Sales can be tricky - banks don't make it easy. Most successful short sale are done using a team of real estate experts, but most importantly, a professional bank negotiator should be on the team. Nine out of ten unsuccessful short sales (ending in foreclosure) generally are real estate agents trying to negotiate their own deals.
Julie Fontaine
Julie Fontaine is the author of "Homeowner's Guide to Avoiding Foreclosure - Strategies & Solutions", and is a business partner in a successful short sale company in San Diego, California, Troubled Property Solutions
View all articles by Julie Fontaine