To Modify or Not: Is Loan Modification is Right for You?

For a lot of homeowners, whether or not to do loan modification isn’t much of a decision. For them, the best answer is obvious. But what if you’re not sure? After all, in addition to loan modification other common options are foreclosure or a short sale. Here are a few pointers to help you determine which among these may be the best path.

Foreclosure

Foreclosure is perhaps the most painful of the options for all involved. Nobody wins with foreclosure, not even the bank. From a legal standpoint, your lender obtains a court-ordered termination of your equitable right of redemption. In other words, you lose all rights to ownership of your home. More specifically, the lender takes possession of the home while you lose the right to redeem it even if you somehow come up with the money to pay back missed payments.

Losing your home is obviously painful for you, not just in the loss of your house, but in the damage to your credit as well — which is pretty severe. But how is it painful for the lender?

Normally, if a homeowner has built up a lot of equity and the housing market is good, then the homeowner can simply sell the house, payoff the bank, and pocket a sizable profit. However, if a home is being foreclosed on, it usually means that there is little or no equity and/or it is unlikely that the home will sell at a profit.

What this means for the bank is that when they take over ownership of your house, they are likely to lose money on its resale. Given any other option, banks and other lenders would prefer to avoid foreclosure.

Short Sale

A short sale, like foreclosure, still hurts both borrower and lender, albeit the hurt factor is usually less. The borrower still loses the home, but takes less of a hit to their credit rating. The lender also takes less of a financial hit.

An important factor to be aware of is that in the vast majority of cases, a short sale does not result in a full payoff of the amount owed, nor will the bank forgive the remaining balance. That remaining balance often stays with the borrower and he or she remains responsible for it.

Loan Modification

A loan modification, in many ways, is a win-win scenario for both the home owner and the mortgagee. This is because the lender continues to receive payments while the borrower is able to keep their home, making smaller monthly payments that are more affordable.

In short, loan modification often results in a lower interest rate, lower monthly payments, and in rare cases even a lowering of the principal balance is possible.

Loan modification is a great option if you still have an income, just not enough to cover your current payments, or you have simply fallen behind due to some sort of financial crisis such as a medical emergency, temporary loss of income, or other factors.

Which of these options is best for you depends on many different factors. But knowing the basic facts of each will help you make a more informed decision and bring you comfort in knowing that you made the right one.