What shall it be; Loan Modification? Short Sale? Foreclosure?
You are among the millions underwater and over stressed. What shall you do.
Your credit will be most negatively affected with a Foreclosure, then a short sale. As long as you stay current on your loan, loan modification should not affect your credit. Your credit score weather it is right or wrong is used by potential employers before hiring, landlords before renting, insurance companies before granting insurance and etc. Depending on your individual situation maybe credit is not important.
My client’s father nearing retirement age could live in his son’s rental unit and will not be looking for another job said he might pass away before his home in Las Vegas is worth as much as as his loan. He opted for foreclosure.
I had another client, a family with parents and adult children living at home. They came to me for a discussion on their options. They are still working and acquiring things so their credit score is important to them. Being an immigrant family losing their home, the “American Dream”, would be extremely emotional and their image amongst friends and family here and back home would be devastated. They struggled making payments, but after family members lost two part time jobs they couldn’t do it any more and came to me for help. They pondered the situation. Should they continue making payments on a home that they owe $250,000 more than it is worth. They purchased this home with no money down and realized they would probably never be able to save the 10-20% now required down payment to purchase another home. They opted for a loan modification. They were hoping for some debt forgiveness.
Their bank would not hear from that. But with persistence similar to a short sale approval I was able to get the bank to modify their 6.5% fixed interest only loan to a Principal and Interest loan starting at 3% for five years, 4% for 1 year and 5% for the next 34 years. Before that, the second lender agreed easily to modify their 8.5% loan to .31% yes .31% not 3.15 but only for 1 year. We will follow up with them in a few months. With home ownership tax benefits their new payments are now about the same as rent would be. They are thrilled, knowing they will now be able to afford the “American Dream”. During these negotiations I had them apply and they were approved for a property tax reduction with annual savings of almost $3,000.
I was told during this process that each loan holder not necessarily the servicing bank has their own set of ratios and criteria for loan modification. This worked out to be win-win situation. Their lender will receive their full payment over a longer period of time rather than losing several hundred thousand dollars during a short sale or incur thousands of dollars for foreclosure expenses.
We have all read that more than 50% of loan modifications are defaulting. Maybe it depends on the modification. I recently reviewed a loan modification for a client that was in default. In November her loan was modified from 8.4% to 7.9%. Maybe $100 reduction and then they had the nerve to add on another $550.00 per month to bring her current. Her payments were $400.00 more than before the modification. If I did not see it myself I would not believe it. What were they thinking? It is no surprise she is in default again only 4 months later.
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4 Responses to “What shall it be; Loan Modification? Short Sale? Foreclosure?”
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When I think of loan modification, I think of one thing. A way for the bank to creatively retain the future earnings from the borrower without losing anything long term.
My opinion of loan modifications is that they’re junk, and they serve no purpose other than short term cash flow problems, which in terms of sound financial planning is not a plan.
Loan mods do not help when your home is worth 70% of what you owe in a market where it may take 10 years to reach a break even point on the sale of your home.
Credit scores are another beast. Someone with a zero credit score can just as easily obtain a mortgage as someone with a 780, as long as they are applying for that mortgage with a reputable, competent lender who looks at more than just the industries “debt award” score.
Lee,
Thanks for the enlightening post and congrats on helping your clients keep their home.
Good points on thinking out the credit score implications too!
Brian
Every seller has a number of things review prior to making a decision on which way to go and more often than not it is very difficult for them to get information that they can rely on. Adding to the problem of short sales and foreclosures are the scams that have come about preying on people when they are down. Lee, you posts points out some great information.
Larry
Lee
you make some great points, it would be much easier if we were all the same, with the same payments, income and other life experiences, but we don’t and thats the negative side, not that we are different but that we get put in little boxes and when it only helps some people it is considered a failure.
If there were more folks like you and your clients who are capable of learning from a mistake or an experience, and have a real interest in not repeating mistakes of the past the results can be a benefit to everyone.