Are Loan Modifications Better Than Short Sales?

Posted by Kurt Novak

June 14, 2009

by Kurt Novak

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.

A loan modification is where your bank agrees to modify one or more of the conditions on your original loan. The more common types of loan modification are reduction of monthly payments, lowered interest rates or even forgiveness of late fees and penalty charges that were added to the balance of your loan.

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.

Three benefits of loan modifications are:

1. The foreclosure proceedings will be stopped right away. You will be able to stay in your own home and not have to uproot your family. 2. By reducing your monthly payments you are giving yourself the chance to get back on your feet financially. 3. You are going to be able to control the damage done to your credit report.

Three drawbacks of loan modifications:

1. You could get your mortgage payments and fees reduced, however, it might not be good enough to help you get back on track. 2. If you miss a payment in the new agreement you will find yourself facing foreclosure again. 3. You may only get your monthly payments reduced for a short period of time. After that period of time is over your payments could go right back up to where they were. If you are not prepared you will be facing financial problems.

Advantages of doing a short sale:

1. A short sale will allow you to get out of debt rapidly. You will not have to deal with monthly mortgage payments and you can have the chance to get back on your feet financially. 2. If your house is worth much less than you owe to your lender, a short sale is probably the only way you can sell your house and get out from under your debt. 3. Most lenders will not come after you for any loss they experience from a short sale. Your debt gets eliminated completely.

Three downsides of short sales:

1. There is a possibility that you bank will report their loss to the IRS. This could create phantom income for your and mean that you may have to pay income taxes on their write-off. 2. As you sell your home with a short sale, you will need to find someplace new to live. This could prove to be difficult, as many landlords will not look kindly on a record of past due payments. 3. Chances for you getting a new mortgage anytime soon are very slim. Many lenders do not have much faith in consumers that had outstanding debt forgiven.

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.

About the Author:

Author Kurt Novak is a long-time property investor specializing in helping home owners avoid foreclosure. Read his blog to find the best Columbus houses and how to perform your own Loan Modification.

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