Both Short Sales and Loan/Mortgage Modifications are ways to prevent an embarrassing foreclosure. In a short sale, you will sell the home and walk away from the loan, hopefully not owing the Lender anything on the prior loan. A Mortgage Modification is a way to retain ownership of your home, hopefully with a lower monthly payment.
The process often takes much longer than the 30-90 days you may have heard about and have no guarantee of relief at the end of the process from your Lender. You can mitigate frustration by retaining experienced counsel in negotiating the process.
Key differences between Short Sales vs Mortgage Modifications
In a Short Sale you owe more than your property is worth. You would consider a Short Sale and agree to sell your home if the Lender would agree to take less money than is owed on your mortgage loan balance. Typically you would hire a REALTOR to sell your home, and then retain a certified counselor to negotiate with the Lender on your behalf to accept a lower payoff amount than is owed. You will want to be careful that you will not be liable for the difference between the sale price of your home and original loan balance.
In a worst case scenario, you could be making payments on a home that you no longer live in!
A Mortgage Modification is similar to a mortgage refinance, only it would not be a new loan, and thus you would not have to qualify via credit score approval. The Lender agrees to change the terms of the existing loan by modifying the interest rate, reducing the payments, and/or extending the term; all with the goal of lowering the monthly payment. Most lenders will require equity in the property to be eligible to qualify for a modification of the loan. If a Modification is approved, your old loan would technically be paid off by a new loan.
Generally, to qualify for a Mortgage Modification, you must be in default or behind in your payments, and show financial hardship such as death, reduced income, divorce, etc. In Arizona, you will want to either negotiate with the lender on your own or hire an experienced negotiator to work with you and the lender. In the event that you want to negotiate on your own, but will often find a lot of frustration and roadblocks.
The paperwork that is required for either a short sale or a loan modification is very similar and typically includes:
- Authorization letter if you are using a 3rd party broker to negotiate
- Hardship letter explaining the change of financial circumstances
- Paycheck stubs verifying income (generally last 2 months)
- Previous tax returns (at least 2 years history)
- Previous 1099 or W2 forms (at least 2 years history)
- Personal Financial Statement
Other options to discus [should you find yourself having trouble making your mortgage payment] include Bankruptcy, Forbearance, a revised repayment plan, and A Deed in lieu of Foreclosure. Your credit will likely be impacted with any option you choose, but some options may have a lesser impact.
Do you have more questions about the difference between a loan modification and a short sale? Contact one of our experts today, we are happy to help.
