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

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.

Initially, many homeowners choose a loan modification. The modifications can come in the form forgiveness of late fees, a reduction in monthly payments pr lower interest rates. You can get one pr more conditions of your mortgage modified, depending on what your bank will agree to do and what you can afford.

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 advantages 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. 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.

A short sale has these three great benefits:

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 issue a 1099-c to write off the cancellation of part of your loan. As a result, you may face a tax bill the following year. 2. You will to have to uproot your family and find a new place to live, after you sold your house by short sale. This could be a traumatic experience, especially if you have school age kids. Landlords may not approve your lease application, as you had overdue debts. 3. Finally, you will have to wait for at least 3 years before you can apply for a new loan. Some banks will treat a short sale reported on your credit report similar to a foreclosure.

While there are definite pros and cons to both loan modifications and short sales, it’s apparent that trying to stay in your own home and paying your debt will work in your favor. After all, your financial problems could only be temporary. If you accept a loan modification and get back on track, you continue to live in your family’s home and maintain a clean credit file. I you go through shortsale you will wipe out your debt, however, you will have to start from scratch.