I found myself in trouble and thats when I learned there is quite a difference between a loan modification and a short sale. They are both ways of avoiding foreclosure and are assessed and approved in the same department at your bank by a loss mitigation officer, but this doesn’t mean they will have the same effect on you or your credit report.
The difference is that a loan modification is where your bank agrees to modify one or more of the conditions on your original loan. The most 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.
Three benefits of loan modifications are:
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. 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. Once your home is sold your debt is gone, which means no more monthly payments are required.
2. If you see no possible way to increase the value of your property any time soon, then a short sale could solve your ‘underwater’ mortgage problem quickly.
3. Your lender may agree to forgive any short fall of funds that exists between your outstanding loan balance and the lower sale price of your home.
There are three disadvantages 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 bad 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. Just remember your decision will stick with you for 7 to 10 years.
Related posts:
- Stop Foreclosure with a Mortgage Loan Modification In 2008, millions of unsuspecting homeowners received a nasty notice...
- Is there such thing as effective do-it-yourself Loan Modification? With the crisis in the housing industry and the current...
- Is Obama’s Home Loan Modification program working? With the crisis in the housing industry and the current...
- Two Reasons why Loan Modification is Better than Refinancing your Mortgage Once of the things American president Barak Obama, along with...
- What is Foreclosure Your mortgage is one of the most important bills we...
{ 0 comments… add one now }