Loan Modification vs. Short Sale vs. Foreclosure

Loan Modification
- While a short sale is usually the best option for homeowners who owe more than their home is worth, it’s not the only one. To make an informed decision for your family, take the time to learn about your options.
  
  Did you know?
  It is estimated that 60%-70% of homeowners who have modified a loan have or will go back into default within the first nine months and back on the road to foreclosure. This proves that many homeowners approach a loan modification with high hopes and realized only after completion, that it was not what they bargained for.
  Why Loan Modifications Often Don’t Work and homeowners find out too late……
  
  1. Modified loans often carry higher balances than the original loan…
  Because many lenders add unpaid interest and fees to the loan balance, homeowners often walk away with more mortgage debt than they originally incurred.
  
  2. and higher monthly payments too.
  It should come as little surprise that with few lenders reducing principal — and most tacking on fees to the loan balance — nearly half of loan modifications actually resulted in increasing a borrower’s monthly payment.
  
  3. Despite modifications, many homeowners are still underwater.
  Most homeowners will basically be stuck in their homes until their property appreciates back up to the level it was when they received their current loan. In some areas this may not happen for 10-15 years. Even if real estate goes back to the historical rate of appreciation of 4% per year, and it starts TODAY, it would take 12 years to break even.
  
  4. Homeowners accept unaffordable terms.
  Desperate to keep their homes, many homeowners accept modification offers they can’t afford.
  If you are in a loan modification, you must consider the future and prepare.
Short Sale
- With a short sale, the lender agrees to accept less from a buyer than is owed on the mortgage. Many lenders are willing to do this because it gives them cash and helps them avoid the expense of foreclosure. Short sales are a complicated transaction with a low success rate. More important, they can create tax and deficiency considerations that must be managed. Make sure you manage the implications and work with a company that has a proven track record in short sales.There are items to consider when pursuing a short sale:Mortgage deficiency
  A deficiency is the difference between the amount owed by the borrower and the amount paid to the lender by the short sale buyer. Maximum RE works hard to get your deficiency waived as a condition of the settlement.Tax implications
  Short sales often create unexpected tax consequences. With Maximum RE, a tax advisor will review your transaction and identify possible negative implications and help craft a transaction structure that mitigates them
  
  Credit rating
  Short sales are typically less impactful to your credit than a deed in lieu of foreclosure. Maximum RE will use all available leverage to protect your credit rating to the extent possible. In the worst case, according to current Fannie Mae Guidelines, it will impact your ability to qualify for a new home for only 2 years.
Deed in lieu of foreclosure
- Deeding your house title to the lender in exchange for their agreement not to foreclose is called a deed in lieu of foreclosure. You negotiate with the lender to accept the deed and they cancel the foreclosure action. It is not without negative consequence to your credit, but If a short sale or loan modification is not an option, a deed in lieu may be an answer. One difficulty in negotiating a deed in lieu settlement is that lenders do not want the property back because it creates liability issues for them and additional costs. If you are able to negotiate a deed in lieu, be aware of the possible negative consequences.Possible Considerations before deeding your home…Forgiveness of debt
  You may be liable for the loan balance if it is not specifically waived by the lender.Tax implications
  If the loan obligation is waived, the IRS may consider it as income and you could be liable for taxes. Check conditions explained in the IRS Publication 4681.
  
  Credit rating
  A deed in lieu is typically more impactful on your credit than a short sale but not as bad as a foreclosure. According to current Fannie Mae guidelines, it will impact your ability to qualify for a new mortgage loan for four to seven years.
  
  This option may not be available if you have more than 1 loan with a different lender as the 1st and 2nd loan may not agree to the terms and the 2nd in particular may feel disadvantaged with the process.
Walk Away (Foreclosure)
- Foreclosure is rarely the best option for homeowners and we STRONGLY ADVISE AGAINST THIS OPTION. In a foreclosure, the homeowner stops making payments and the lender takes possession of the house. Foreclosures create additional expense and liability for the lender. Depending on the state you live in, you may still owe the debt even after a foreclosure. They may also lead to more severe tax consequences and significantly impact your credit.You must consider all possible considerationsMortgage deficiency
  A deficiency is the difference between the amount owed and the amount received at the Trustee Sale. You may be liable for the deficiency if you walk away.Tax implications
  If the deficiency is forgiven, the IRS may consider it as income and you could be liable for more tax than you would with a short sale. Check conditions explained in the IRS Publication 4681.
  
  Credit rating
  A foreclosure has a far worse impact on your credit than a short sale. It remains on your credit record for 7 years and, according to current Fannie Mae guidelines, will affect your ability to purchase a new home for 7 years.

While a short sale is usually the best option for homeowners who owe more than their home is worth, it’s not the only one. To make an informed decision for your family, take the time to learn about your options.