A Short Sale Or A Loan Modification - Think Twice About A Loan Mod

I’m not a real estate attorney or any type of attorney for that matter so I’m not here to provide advice or guidance or an official opinion per se. I'm also not here to talk about San Diego foreclosures.

What I am here to do is to provide some reasons why you might consider a San Diego short sale versus a loan modification in the event you live in San Diego, or in any other city in the US for that matter.

In brief, a short sale is where the mortgage lender agrees to allow a home to be sold for less than the mortgage balance owed. A loan modification on the other had is where the lender modifies the terms of the mortgage by altering the interest rate, payback period, principal amount owed, or some other adjustment for either a permanent or temporary period of time.

When you look at what a short sale is versus a loan modification it seems to me that a loan modification would be a great option for any homeowner and the lender.

For the homeowner:

 

  • they get to keep their mortgage on affordable terms,
  • the homeowner also doesn’t have to pick up their roots and move their family to a new location, and lastly
  • the homeowner doesn’t really need to get anyone else involved in a loan modification (pay someone else some fees for their services) if they can successfully do what the lender requires to approve the loan modification.

 

For the lender they get to keep an active mortgage on their books.

But there are many reasons that loan modifications fail. So you may want to think twice about that no-brainer of a loan mod.

Here are five reasons a short sale may be better than a load mod.

1. Lenders lie. Okay, maybe they don’t intentionally lie, but they do make loan mod offers and then later retract them at the most inopportune times. They can also give a temporary loan mod and then turn around 3 months later and tell you that you do not qualify for a permanent loan mod. They may even give you another 3 month trial and then turn you down. See WSJ: The Maddening World of Mortgage Modifications.

2. Speaking of “permanent” loan mods, they often are not actually permanent. Many times, the lower interest rates are good for only 3 to 5 years.

3. If you are making reduced payments through a temporary loan mod with the lender, and then later your permanent loan mod is rejected, you may find yourself in default with the lender threatening to foreclose if you don’t catch yourself up.

4. Lenders will keep asking for updated financial documents in order to try and get further payments from homeowners and discover assets in case of eventual lawsuits.

5. Finally, some loan mods are only a forbearance and the missed payments along with penalties and interest are added to the end of the loan as a balloon payment. The balloon payment means that you would have a significant balance due at the end of your mortgage term that you must pay in a lump sum or you could lose your home.

6. For the most part if you do your negotiations with the lender in such a way the short sale can be final with no future ramifications either financially or with taxes. In a loan modification situation you may have changes and surprises from your lender for the term of your loan with them which could cost you your home, money and credit.

 

I could go on, but I’m going to stop here. There is a lot of information here to digest. The bottom line is that if you are considering a loan modification you should do your due diligence and investigate the possibility of a short sale too. You may be surprised at how quickly you could be out of a bad situation and able to begin with a fresh start.