Consumers need to be aware that there is a big difference between getting a loan modification and going through a short sale. Both of these methods may help a homeowner avoid foreclosure. They are taken care of through assessment and approval in the loss mitigation department of your lender. However, they will not have the same result with respect to your financial situation.
When you are considering a loan modification the bank will try to modify some of the conditions of your original loan. There are a variety of conditions the bank may want to change. That includes lowering monthly payments, reducing your interest rate or forgiving late fees and other penalties.
If you feel that a short sale is your best way out of your financial troubles, you have to keep in mind that you will have to sell your home, even if it is for less than what is owed to the bank. When the transaction closes, the bank will forgive what is left on the mortgage.
How are you going to benefit from a loan modification on your home mortgage?
1. You will not have to worry about finding somewhere else to live, because you will stop foreclosure proceeding right in their tracks. 2. If you are able to get payments or fees reduced, you will have extra time to get your finances in order. 3. There will be less damage done to your credit score.
Here are some drawbacks of doing a loan modification:
1. Even if the bank approves a reduction of your mortgage payments you may still not be able to recover financially. 2. Should you miss any of the agreed upon payments you could be running the risk of the bank reinstating foreclosure proceedings again. 3. Your bank might only offer reduced payments for a limited period of time. Your payments would likely go back up before long which could cause more financial problems.
A short sale has these three great benefits:
1. As soon as your home is sold your debt will vanish, this means no more monthly payments. 2. If you have come to the conclusion that your owe more than your house is worth and there is no possible way to increase the value of your property then a short sale could be just the right solution. 3. Most likely your bank will agree to forgive the difference between the amount you owe on your mortgage and the lower the sale price of your home.
Three downsides of short sales:
1. Your lender may report the forgiven portion of your mortgage to the IRS. This could mean you face a tax liability next year. 2. Once your home is sold, you’ll need to move. Finding a rental property could be difficult if your landlord is sensitive to your delinquent payment history and damaged credit. 3. You won’t be able to apply for a new mortgage any time soon. Other lenders will be wary of customers with a history of having outstanding debts forgiven rather than repaying them.
There are pros and cons to both methods of stopping possible foreclosure. If you choose to go with a loan modification you will be able to stay in your home and repay your debt over time. Most homeowners prefer this solution rather than wiping out your debt with a short sale and starting from scratch.
