I have many articles within this website advising clients to go down the path of a Loan Modification before they go for a short sale.  I reserve the right to change my opinion or contradict myself.  I currently believe if the home is too far upside down in value - you are better off getting rid of the house in order to help secure your future finances.  Otherwise - you may just be delaying the inevitable.  The 2nd problem: Banks are slower than Christmas on completing a loan mod: typical bank red tape.  So here we go:

Realistically, a Loan Modification is a BAD IDEA!  Here is why:

  1. Modify the current Balance PLUS: Your bank will attempt to Refinance your current balance including closing cost and any late payments.  This will ADD to your current Balance.  Your current balance is more than the home is worth.  Bad Idea.
  2. NO Reduction in Balance: Your bank will not agree to reducing the balance you owe them.  You may think they will, you may have read something on their website, you may have a friend who is telling a white lie, but it will not happen.
  3. Affordability: End of the day, you can't afford the house.  Most likely a hundred or a couple of hundred dollars reduction in monthly payment will not help you in the affordability area.
  4. Limited Success thus far: A tiny fraction of people going for a loan modification actually get one.  The problems are well documented within every real estate and news source in the country.  Just Google "Loan Modification problems" or any other string of keywords.  The stories will give you a small glimpse in to your future modification struggles.
  5. Credit Score implications: Most banks will not work with you on a modification unless you stop paying your mortgage.  Once that happens, you will start getting dings to your credit.  3-4 months into it, you will still be getting the run around from your bank.  Around 4 months of non-payment many banks have an automatic foreclosure button that gets pushed and you may end up getting served papers.  Now you are in a bigger problem.
  6. Bad Investment: Your house is your home but it is also an investment.  Investments can be good or bad, but you must know when to bail out.  If the investment has gone bad, it may take a decade or more to get back to the value where you break even. (Remember, real estate typically has about a 2% average appreciation.)  You will be paying interest on an overvalued investment.  Interest is also known as Profit to the banks.
  7. Delay the Inevitable: If you are one of the lucky ones to reduce your monthly payment to something that is manageable, congrats!  For those lucky ones I anticipate many will end up in Foreclosure or a Short Sale at some point in the next few years.  I believe this because their houses will still be worth less than they owe which will prevent them from selling should another job loss happen, a medical emergency, a job transfer, etc.

Options for a Over Mortgaged home that you can no longer afford:

  1. Loan Modification:  See above.
  2. Short Sale:  In my opinion, your best option.  This is selling for less than what is owed with the banks approval.  Read about Short Sales information for Florida residents.
  3. Deed in Lieu of Foreclosure:  Deeding the house back to the bank voluntarily.  Bank will want you to attempt short selling first and then might consider this before they foreclose.
  4. Foreclosure:  Walking away and giving up.

We meet with clients daily who need to sell a property and are overly frustrated with their bank.  Don't wait too long before you make the decision to sell.  It still takes time to sell a home in this market:  Even a short sale.  Contact our team if you would like to schedule a meeting to discuss your options.

Posted by Brad Officer on
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