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Should You Short Sale Your Home or Complete a Loan Modification?

The market is just beginning to stabilize but short sales and foreclosures will be with us for a couple more years. The options for many distressed home owners are the following:

(1) Do a loan modification with subject lender.

(2) Complete a short sale of mortgage.

(3) Just walk away mortgage obligation altogether.

Obviously, the loan modification is the best choice for most people. The government is pushing banks to offer loan modification programs for home owners who are current on the mortgage payment but still in trouble with the resetting of the loan’s interest rate.

Although the loan modification process will take time to complete, this tool will help get the payment down far enough which enables most homeowners to stay in their home. Not everyone will qualify for a loan modification however.

If a borrower doesn’t qualify for a loan modification, then the short sale is the next best option. In a short sale situation, the bank agrees to lower the mortgage payoff so that homeowner can sell without bringing in any money to close escrow.

There may be tax consequences for doing a short sale but in most cases, the debt relief would not bring on taxes because of the government’s debt relief law that we are currently operating under. Always check with your CPA before doing a short sale.

The short sale option will not look as bad on a borrower’s credit as it will show the borrower cooperated. It will be much easier to qualify for a mortgage in 2-3 years providing the short sale option or loan modification is used. Don’t forget to check with a CPA or real estate lawyer first.

The third option is to just walk away from the loan altogether. This is really a last resort. The reason why this is the last resort is a foreclosure will stay on your credit report for 7-10 years. That’s an awful long time to have bad credit.

I don’t recommend this option ever, unless the mortgage holder bank will not cooperate on a loan modification/short sale. Only then should a home owner consider walking away and only if the home owner has tried every other option to afford the home.

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