Are There Benefits to a Loan Modification Over a Short Sale?
Articles - Mortgage
There is quite a large difference between a loan modification and a short sale. Both forms of avoiding foreclosure 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.
by KurtNovak


There is quite a large difference between a loan modification and a short sale. Both forms of avoiding foreclosure 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.

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. 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.

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. 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. 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.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Author Kurt Novak is a full time real estate investor who helps home owners avoid foreclosure. Read his blog to find the best Columbus houses and how to perform your own Loan Modification.