Benefits of modifying a loan against short selling

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Whether you should support modifying a short sale loan depends in part on the following:

  • Your financial situation
  • Bank readiness
  • Your desire to keep your home

It becomes even more complicated if the bank refuses to consider the current market value of your home. If you really want to stay in your home, regardless of its value, then a loan modification option might be a better option.

Credit modification terms

Credit modification terms

 

The purpose of the loan modification is to reduce the home mortgage payment and make that payment available.

This is achieved by applying one or more of the following:

  • Interest rate reductions
  • Extending the loan term
  • Adding unpaid interest on main
  • Reduction in principal

The Office of the Comptroller of the Currency, which regulates national banks, says many loan modifications do not reduce the main amount of debt. It may be disturbing news that a large number of loan modifications are soon becoming delinquent. This is often just a temporary fix, not a long-term solution.

Temporary loan modifications

Temporary loan modifications

 

Note that some banks offer temporary loan modifications. This means that the bank will not agree to make a permanent loan modification, but may instead offer the following conditions:

  • The main balance remains the same.
  • Homeowners are asked to make a new reduced payment.
  • The deadline for a new payment is set in 3 to 6 months.
  • The implication is that if a homeowner makes new payments on time during a temporary credit mode restriction, the bank may approve a permanent loan modification.

However, at the end of the term, the bank is free to say, “Thank you very much for giving us some money, but your loan is now outstanding.” And the bank could continue to stop. I have heard this story from several Sacramento clients who were forced into a short sale by this maneuver.

Why might there be a short sale through loan modification?

Why might there be a short sale through loan modification?

 

Homeowners who would like to get out of the water may prefer to make a short sale in exchange for a loan modification. A short sale means that the bank will accept a reduced payment and release the loan. If your home is worth drastically less than the amount owed, it might make more sense to make a short sale and be free of burdensome debt.

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