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The Pros and Cons of Loan Modifications as Compared to Short Sales


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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.

Three benefits of loan modifications are:

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 some drawbacks of doing a loan modification:

1. The reduction of your monthly payments might not be enough to completely free up your cash flow. 2. If you miss any payments on your modification agreement, then your lender could begin foreclosure proceedings again. 3. Your lender may offer modified payments only for a short period of time. This means the payments may go back up in the future, which could increase financial stress if you're not prepared.

Advantages of doing a short sale:

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.

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.
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