Loan Modification vs Short Sale: Which One Is Best for You?
When a homeowner can no longer afford the mortgage, it’s time to decide how to get out of debt. There are two main types of debt relief available: a loan modification or a short sale. You must take the time to understand what each of these options entails, including its advantages, before making a decision.
Deciding What Is Best for You
Deciding which option is best is a difficult question to answer. There are many factors you must consider, including:
- Do you want to retain the property?
- Will you be able to get the bank’s consent?
- What does your current financial health look like?
Remember, things can always go from bad to worse. For instance, the bank may not agree with your request to consider the current market value of your home. If you still want to stay in your home, a loan modification may be the best way to go here.
What is a Loan Modification?
A loan modification changes the terms of your original mortgage. In doing so, you can expect the following:
- It will extend your loan’s maturity deadline
- Having a loan modification will lower your loan’s interest rate and the overall principal balance
- It will inflate the principal balance on your loan and your monthly payment by adding the unpaid interest to the balance
Unfortunately, not every bank is willing to help its customers in this way, especially if doing so will reduce your monthly payment. Some banks will offer a loan modification but increase your monthly payments because they’ve used a different ratio to decide what you’ll repay each month. However, there’s a 38% cap in respect to your gross monthly income that is used to determine your loan repayment amount.
What Is a Short Sale and Why It May Be a Better Option?
When you’re worried about the financial state of your property, you may want to opt for a short sale instead of a loan modification. With a short sale, the bank will sell your home for less than what you borrowed. You will be responsible for paying a reduced amount to the bank that releases your home.
A short sale is best when your home is worth less than half of what you owe. The benefit of a short sale is that you can buy a more affordable home in two or three years.
Unfortunately, you can’t have both of these processes at once. Instead, you must take a moment to determine which of these debt relief options is a better choice for you. Banks won’t work on two files at the same time.
As soon as you approach your bank about having a loan modification, they’ll suspend any ongoing short sale process. Both processes will take about the same time, so there’s no reason to choose one because you think it’ll be faster. You’re looking at three to six months for either process.
If you’ve already had a buyer enter a good faith offer on a short sale, it would be unfair for you to opt for a loan modification. This is because they’re waiting on their approval only to discover that you’ve abandoned the transaction in the middle of it.
Receive the Legal Help You Need
Now that you have a better understanding of what your two options are, it’s time to get the legal help you need. If you need advice choosing an option or filing the paperwork for a short sale or a loan modification, contact Bartifay Law today.