Saturday, January 2, 2010

Loan Modification VS. Short Sale

What is the difference between a loan modification and a short sale?

First of all, let me clarify the definition of a loan modification: A Loan Modification is a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford. There are many questions you may have specifically, so please see the link: http://www.hud.gov/offices/hsg/sfh/nsc/faqlm.cfm. A loan modification is used if you are behind on your mortgage and have been impacted by a financial hardship, it will save your home from entering foreclosure. The mortgage loan is restructed so that it becomes affordable and can fit within your budget. Obama presented this as part of his Homeowner Affordability and Stability Plan, in which he dedicated $75 billion. The plan states that the mortgage payments would stay below 38% of the borrowers gross income, and the government would pick up the rest of the tab. This lower payment comes from the mortgage interest rate going as low as 2%, the loan term being extended (up to 40 years), or having a loan principal at no interest. The loan servicer will be paid $1,000 for each modification and will get an additional $1,000 a year for up to three years. In order to qualify for a loan modification, the borrow must sign an affidavit of financial hardship and verify their income with documents. Loan mods used to be reserved for borrowers whose mortgages became deliquent because of job losses, divorce proceedings, or illness, but today they are also open to those individuals who are suffering in the aftermath of adjustable rate mortgages skyrocketing and placing the monthy payment beyond the means of the borrower. It is vital to begin the process as soon as possible when the damage to the budget and financial backup of the homeowner is still containd. The sooner a fixed rate can be negotiated, the better the odds of receiving a most benefical rate. Legal assistance during the process of applying for a loan mod is essential in the attempt to make the lender sit up and listen and provide the best possible solution for any homeowner before it's too late. In all, a loan modification should help save your budget, your home and your good credit.

Now that I have addressed loan modifications, I will give you an overview of a short sale. Short sales happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell and pay all costs of sale. Not all lenders will negotiate a short sale. It used to be that lenders wouldn't even consider a short sale if your payments are current, but that has changed. Banks grant short sales for two reasons: the seller has a hardship, and the seller owes more on the mortgage than the home is worth. A few examples of a hardship are: unemployment, reduced income, divorce, medical emergency, job transfer, bankruptcy, death. The seller will need to prepare a financial package for submission to the short sale bank. Each bank has it's own guidelines but the basic procedure is similar from bank to bank. The seller's package will most likely consist of: letter of authorization (allowing your agent to speak to the bank), HUD-1 (preliminary net sheet), completed financial statement, sellers hardship letter, 2 years of tax returns, 2 years of W-2's, recent payroll stubs, last 2 months of bank statements, comparative market analysis.
A short sale will affect your credit negatively, though not as badly as a foreclosure. Stil the lenders interpret a short sale as a customer did not pay as agreed, but the good news is a short sale will allow the consumer to obtain an institutional loan for a new home in two years. (As compared to a foreclosure, which will remain on a consumer's credit report in the public records section for 10 years). As far as FICO scores go, they are affected by: 1. serious deliquency 2. derogatory public record or 3. collection filed. A homeowners default is technically, "in collection." With a short sell, sellers will take a hit of 100 to 300 points, depending on overall condition of credit. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 380, although it may stay closer to 580 depending on the specific situation and how far behind you are on mortgage payments to determine exactly how it will affect your credit.

1 comment:

  1. hi amber :]
    your blog is so detailed, i love it.

    xoxo
    wellies.etsy.com

    ReplyDelete