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.
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 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.
Three drawbacks 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.
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.
As you can see there are definitely both good and bad points in either a loan modification or a short sale. It is our experience that most consumers want to find a way to stay in their home and pay off their debt, especially, if their financial problems are just temporary. If you are completely overwhelmed with debt and there is no end in sight to your financial hardship, the road of a short sale may be the best solution, because it allows you to start fresh.