Short Sale or Loan Modification? Which option is right for you:

by Leah Santos

A short sale is an attempt from the borrower to avoid a foreclosure and thus partially salvaging their credit rating and lifting the burden of heavy mortgage debt. The debt is reported to the credit bureaus as a settlement. The effect to the borrower’s credit is nothing compared to the effects of a foreclosure and a borrower’s credit can be restored in as little as two years. A loan modification is the renegotiation of the terms of the mortgage by the lender.

How do you know whether a short sale or a loan modification is right for you?

Simply put loan modification can make the payment more affordable but rarely reduces the loan amount. If you owe more than your home is worth you have what is called negative equity. While this is a tough emotional decision due to attachment to one’s home, one must seriously consider the economic reality. Consider what price you would pay for a like or better property? If you were to rent a similar home, what price would that be? Deduct the current mortgage commitment from what you would pay for a similar property in the current market and multiply the difference by twelve months.

Where is that money essentially going?

Nowhere, as your property value will probably not increase for another five years. Take the aforementioned amount and multiply that by five years! Loan modifications are more of a benefit to the lender than they are to the borrower. Lenders prefer loan modifications because they make money on the points and closing costs. Loan modification is in essence a refinance. They also do not have to provide a deep discount on the actual loan amount. Keep in mind the lender is working for their own best interest, which is directly adverse to the borrowers interest.

How do you know if a short sale is right for you>

To determine if a short sale is right for you it would be wise to consult with an agent to determine eligibility and the best course of action. The first step to the short sale process is listing the property for sale at a price that a buyer would be willing to pay for it in today’s market. Once a buyer is acquired, a purchase contract is then submitted to the lender along with a complete package outlining the financial hardship of the borrower. This process puts a stop to the current foreclosure action against the borrower and allows for negotiations to begin. Short sale negotiations take a minimum of four to six months, during which an owner can live in their property without the financial burden of making the monthly payments. The agent for the borrower must do all that is legally within the scope of representation to protect the borrower from the lender and to advocate on behalf of the borrowers position.

If the loan amount was for $300,000 and the short sale settled for $150,000, what happens to the other $150,000 that was originally owed by the borrower?

If the property was the borrowers primary residence the debt is forgiven and the bank releases the borrower from further legal action or deficiency judgment. If the property is a secondary mortgage the borrower may be issued a 1099 or the bank may ask for a promissory note to be signed. Each case in unique and you must make sure the person negotiating the short sale on your behalf is skilled and has your best interest at heart. For instance, for a borrower a 1099 is favored over a promissory note. The 1099 can be disputed with a good tax attorney, the promissory note may be harder to contest. In most cases if a borrower can prove insolvency or financial hardship, they can usually find ways to be released from their debt successfully.

A consultation with an experienced short sale specialist is recommended to determine the best course of action for your particular situation. It is important to have a good understanding of the factors of the factors that lead to a successful short sale so that you can remain positive and optimistic throughout the process. make it an experience.

Back to Company News