Today, millions of Americans struggle to pay their mortgage payments. Whether it's because of a change in income, lost job, an injury or illness, or because of a costly divorce; these financial burdens can be overwhelming. In any case, the goal is for you to relieve yourself of the gargantuan financial burden with the least repercussions. As a result, a growing number of homeowners consider a loan modification vs. short sale. While each of these solutions have challenges, both are better than losing your house to foreclosure. Continue reading to learn more about loan modification vs. short sale.
What is Loan Modification?
The goal of a loan modification is to lower your mortgage payment, which will make it more affordable. Loan modifications achieve one or more of the following:
Lowering the principal balance
Extending the term of the loan
Reducing the interest rate
Adding the unpaid interest to the principal balance
One of the top benefits to a loan modification is that you do not lose your home.
What is a Short Sale?
If you can't qualify for a mortgage modification, or can't afford a mortgage payment, you may consider a short sale as an option. A short sale entails you selling your home for less than the amount you owe. Once you find a purchaser and an offer has been made, the lender must agree to accept less than the amount that is owed on your mortgage. With a short sale, the lender will take a loss, but many lenders agree to this deal as a way of avoiding the hassle of foreclosing on your home and selling it.
Key Differences Between Loan Modification vs. Short Sale
In comparison of a loan modification vs. short sale, both transactions take about the same amount of time to conclude, which can be anywhere from three to six months or more. In addition, the paperwork required in either process is relatively similar, such as:
- Hardship letter to explain the circumstances
- Letter of authorization if you are using a 3rd party broker
- Income verification, such as pay stubs and tax returns
- Personal financial statement
- Lengthy application and review process
While they share a few similarities, there are differences.
With a short sale, you probably owe more on your home than it is worth. Short sales require you to hire a realtor to sell your home and then work with an attorney (or occasionally your realtor) to negotiate with the lender on your behalf. The goal is for the lender to take a payoff amount lower than what is owed. It's important to ensure that you are not liable for the difference between the original loan balance and the selling price of your home. In a short sale, releasing the liability is critical - but not guaranteed.
This option is more favorable in comparison to a short sale because it's more like a refinance. However, a loan modification wouldn't be a new loan. Instead, your lender must agree to alter the terms with the overall goal of lowering your monthly payment. With modifications, your original mortgage will still be in place, but with a modified promissory note.
While everyone's situation is different, some people have to weigh the pros and cons of a loan modification against those of a short sale. However, the loan modification process can be very confusing. As a result, it's best to consult with an experienced team of legal professionals to help determine whether you're a good candidate for a loan modification, or whether you should consider alternatives.