Real Estate

Are There Benefits to a Loan Modification Over a Short Sale?

When you are a homeowner struggling with your mortgage payments you should understand the difference between a short sale and a loan modification. Both of these methods may help you get out of a foreclosure situation. They are dealt with in the same department of your bank by a loss mitigation professional. Homeowners should be aware that the approach you choose may have a very different results on your finances.

Initially, many homeowners choose a loan modification. The modifications can come in the form forgiveness of late fees, a reduction in monthly payments pr lower interest rates. You can get one pr more conditions of your mortgage modified, depending on what your bank will agree to do and what you can afford.

If you are looking into a short sale, you will actually sell your house. You will get your bank to agree to a sales price lower then what is owed on the mortgage. Once the the sale is completed, the bank will forgive the rest of the money owed.

How are you going to benefit from a loan modification on your home mortgage?

1. You effectively stop foreclosure proceedings and get to stay in your own home without the hassle of moving or finding a place to rent. 2. Reduced monthly payments or lower interest costs means you have more time to get yourself back on your feet financially. 3. You’re able to minimize the amount of damage done to your credit score.

Here are three disadvantages of loan modifications:

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.

Three benefits of short sales:

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.

There are three disadvantages of short sales:

1. Your lender may issue a 1099-c to write off the cancellation of part of your loan. As a result, you may face a tax bill the following year. 2. You will to have to uproot your family and find a new place to live, after you sold your house by short sale. This could be a traumatic experience, especially if you have school age kids. Landlords may not approve your lease application, as you had overdue debts. 3. Finally, you will have to wait for at least 3 years before you can apply for a new loan. Some banks will treat a short sale reported on your credit report similar to a foreclosure.

While there are definite pros and cons to both loan modifications and short sales, it’s apparent that trying to stay in your own home and paying your debt will work in your favor. After all, your financial problems could only be temporary. If you accept a loan modification and get back on track, you continue to live in your family’s home and maintain a clean credit file. I you go through shortsale you will wipe out your debt, however, you will have to start from scratch.

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