Facing Foreclosure?  Should you Short Sale or Modify?

Many people are unaware of the big differences in financial repercussions when choosing between a loan modification and a short sale when facing risk of foreclosure.

Here are 4 things many homeowners do not take into consideration when choosing to modify their mortgage:

1. What was the reason you bought a home in the first place?  Does that ‘benefit’ or reason still exist today? Many people bought their home as a place to ‘bank’ their money and take advantage of the tax benefits which made it better to own than to rent. Even more bought in the last decade with hopes for having a home appreciate in value, to augment their retirement or lifestyle.

2. Does it make sense to hold on to a home that is $100,000 or more negative in equity or would it be better to ‘reset’ and buy again in the next couple of years while prices are at their lowest?  If you truly have a financial hardship, you have a good reason to prepare yourself for the future by making financial decisions to protect yourself and loved ones.  The temporary Government incentives (MDFRA of 2007) are set to expire next year.

3. If you owe a substantial amount more than the home is worth, are you willing and able to ‘sit tight’ for the possible 10-12 years that it will take before the home is ‘worth’ enough to be able to sell without taking a large chunk of change out of your pocket.

4. A loan modification rarely will include a ‘principal reduction’ but at best, your lender may just allow for a principal forbearance. A principal forbearance simply means that the lender will not charge you interest on part of the loan balance, but if you ever decide to sell or refinance, you will have to pay off that additional balance. Or, at the end of your loan (30 or 40 years) that principal balance will still be due as a lump sum.  Banks have been fighting ‘principal reductions’ for years.  They know that as soon as they start forgiving loan balances on negative equity homes, thousands of people will intentionally default on their negative equity home with hopes of also being given a “principal reduction” to avoid foreclosure.

There are instances when a short sale is not the best option either:

1. When the borrower has substantial liquid assets that are not in protected accounts (such as a protected 401K) as the lender may not know about those assets until the seller’s financial statement is submitted with the short sale package.

2. If you qualify for a loan modification and your mortgage balance is not much higher than your property value.

3. If the agent that you hire does not understand the difference between a release of lien and a release of liability. There have been many cases over the past 3 years where sellers have ended up with MORE potential liability with a short sale, than had they let their home foreclose. This was ONLY because the agent they hired to assist them was not qualified to negotiate a settlement in the seller’s best interest. The banks will always look out for their best interest, so you need someone as qualified and intelligent to look out for yours.

If you are facing foreclosure, trust a professional capable of representing your best interest. While the risk of foreclosure can pose a financial burden, there are ways to minimize your losses and retain a secure financial future. We are foreclosure property experts and will help you avoid pitfalls and capitalize on the many opportunities available to you.