When a homeowner is faced with an unaffordable mortgage payment there are two principal choices for the homeowner in today's market to avoid foreclosure. These are either a loan modification or a short sale. I offer advice for clients in this situation and can help you work out what are your best options, whether it's a short sale or a loan modification or something else. Many of my clients have asked me for a brief explanation of what's involved in either a loan modification or short sale. In this article I'll explain each and go over some of their pros and cons so you can get a better picture of which one might be best for you. Though, don't forget I'm here to help you out with both of these, so don't be discouraged as I can offer you expert advice on which option is best for your individual circumstances.
A loan modification is best for homeowners that have a temporary financial hardship or have an adjustable rate loan, finding themselves unable to make the loan payments under current terms of the loan. A loan modification focuses on changing the interest rate or length of the terms of the loan (extending it up to 40 years) to make the current loan more affordable.
Reduction in the amount that is owed rarely occurs. So if you are upside down in your mortgage - you will remain so. In high foreclosure states such as California, Nevada, and Florida which have experienced a significant price drop, homeowners may find themselves with negative equity that may take years to recover. A loan modification will not solve this issue and some may be forced to do a short sale anyway if they need to sell in the future. There are some significant drawbacks to loan modifications, so choose carefully and get some legal advice before you pursue this approach.
Here are some little known facts about Loan Modifications:
1.53% of all loan modifications fail after 6 months
2.Strict qualifications may not make you eligible
3.Most loan modification companies charge money and offer no guarantees
4.You will remain upside down on your mortgage if you currently have no equity
5.Interest rates are fixed for only 5 years - subject to future inflationary rates
6.33% of all loan modifications result in HIGHER payments
7.May or may not result in reduced interest rate and loan terms
Is a short sale for you?
The short sale of a home is most appropriate if the home is truly doesn't make sense to keep, with either unaffordable payments, or significant negative equity. Job loss, reduction of income, illness, divorce, or just a bad loan, are all valid reasons that homeowners are selling today. When the house is worth less than the mortgage balance, the sale of the home will not pay off the existing debt. One of two scenarios must happen: 1) The homeowner comes out of pocket to pay the shortfall amount for the existing debt to be extinguished or 2) The existing mortgage holder (bank) agrees to take a loss on their debt to allow the home to be sold, granting a short payoff. This is known as a short sale.
With the high negative equity situations, banks are electing to grant the short sale to sell the house. The banks are not required to do this -their other choice when homeowners have stopped paying them, is to foreclose. Ultimately if the financial numbers work, it may be cheaper for a bank to short sale rather than foreclose.
Why a Short Sale?
1.Enables the sale of the house without money coming out of pocket for closing
2.Allows for financial recovery during the short sale process
3.Releases you from your negative equity (upside down) position
4.Capitalizes on the bank's current motivation to grant a short sale
5.May forgive taxes owed from the short sale
6.Provides quicker credit recovery than foreclosure
7.May allow you to buy another home at today's bargain prices!
Closing Short Sales can be tricky - banks don't make it easy. Most successful short sales are done using a team of real estate experts, but most importantly, a professional bank negotiator should be on the team. Nine out of ten unsuccessful short sales (ending in foreclosure) generally are real estate agents trying to negotiate their own deals. So once again make sure you get the right advice and know who you are dealing with. I offer a free initial consultation to anyone who would like further help in this area.