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Loan Modification – Not Always the Right Answer

In this difficult climate of delinquent mortgages, impending foreclosures, and stagnant home values, you may have tried to get a loan modification with your loan servicer. You may have even been approved for one only to find out that you are no better off than before your bank modified your loan. The bank may have given you a modification that, although was appealing to them, didn’t really help you. For example, there have been cases where a bank actually offered a homeowner a loan modification that increased their monthly mortgage payment. How can this happen? In certain situations the bank can add the missed mortgage payments to the back end of the loan, and then the bank can recast the loan over many more years to keep the payment down. But at the end of the day all you are left with is a mortgage with a higher balance on your home that’s probably worth much less then what is owed.

Not all loans are modified this way. There are many aggressive loan modification programs that will reduce the principle of your mortgage balance. But, at the end of the day it is important to remember that while modifications seem like a good solution to mortgage issues, they are not always a magic bullet.

What Are Your Alternatives?

Seeking out a modification or going into foreclosure are not the only way to get out of a tough situation with an underwater home. Most banks would love to avoid foreclosure. It’s a costly process that in the end loses money for everyone. If you can’t or have not qualified for a loan modification, you are left with only two choices: “deed in lieu” or “short sale.”

Deed in lieu is where you cooperate with the bank and essentially hand over the keys to your house and transfer title (ownership) back to the bank. However, many banks do not want to take possession of the property and so a short sale may be the superior option.

What is a Short Sale?

A short sale is a property that sells for less than the balance owed on the mortgage. The lender agrees to accept a discount on the mortgage to avoid a possible foreclosure or bankruptcy. The bank gives permission to an outside buyer to buy the property from the seller/homeowner. Short sales have become very popular over the past few years and have played a major role in the housing recovery. There are many benefits to short selling a property, both to the homeowner and to the bank. For example, foreclosures take time and are costly to a mortgage servicer. No bank wants to foreclose; they know that the longer the property is occupied the better condition it will remain in alleviating costs associated with major repairs from an abandoned property. The bank would much rather use an alternative measure like a short sale. Many banks even offer great short sale incentives to entice homeowners to list and short sale their properties.

There are even government programs that have been created to help the short sale initiative if you qualify. The program can waive any deficiency between the sale price and the amount owed on the mortgage and it also pays relocation assistance funds to help you get started at a new property. There is even a federal temporary tax program, which ends at the end of 2012 (which may or may not be extended) that will alleviate any taxes on the forgiven mortgage balance.

Short selling a property is a good idea right now if you are faced with a delinquent mortgage and have not been approved or been happy with your loan modification. But it requires proper planning. Don’t wait until you receive a foreclosure notice in the mail and then start to attempt to contact your bank about a short sale. Seize the day, contact one of our Moorestown short sale lawyers and attempt to get this process started.