Debt
Ask Jean Thursday: Debt Distress
Posted by Jean
As a distressed homeowner, should I try to modify my loan, or short sale my home?
-Eve, Florida
By distressed, I assume you mean unable to make your mortgage payments. If you can pay your mortgage – even if your home is one of the one-third in this country that are underwater – then as long as you are not in a position where you have to sell, you can hold on and wait for property values to come back. But if you can’t pay, you’re right to be exploring both of these options.
Let’s run through the pros and cons of each.
A loan modification is designed to keep you in your home. A loan modification, in most cases, trims your monthly payments by lowering the interest rate. Generally the new lower rate will last five years, which will hopefully be enough time to get back on your feet. Although loan modifications were advertised not to impact credit scores, that’s not how they’re actually working. Lenders are reporting to the credit bureaus that borrowers with modifications are making partial payments which is taking down scores 75 to 125 points. (Foreclosures, on the other hand, reduce scores by two to three times that amount.)
Short sales, on the other hand, provide a way for you to sell a home that’s worth less than you owe on it. If you are underwater in your loan and can’t make your payments, you may be able to arrange with the bank to sell it for less than you owe on the mortgage. A lot of back and forth goes into this process, but if you are successful you can walk away from the home doing about the same amount of damage to your credit score as you would with a loan modification and start fresh. And while in years past, you might have been charged income taxes on the amount of debt you were allowed to escape, right now that’s not an issue as long as the amount of debt forgiven is less than $2 million and the home is your principal residence.
So which is the lesser of two evils? If after running the numbers on a loan modification, you believe you will be able to afford to make the payments at the modified rate, I’d pursue that option. Yes, the wheels on loan mods have been moving very slowly, but over the last month a spate of bad press has kicked things up a bit. Start with a phone call to your lender. Speak to someone in the workout department. And if you are having difficulty communicating, go to HUD.gov and speak to a housing counselor. Ask the counselor to call your lender with you on the line and act as an intermediary. Be patient. And good luck.
COMMENTS | 3 comments so far
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It’s hard to anser the question when she does not state her income or other debts.
Both loans mods and short sales ruin you’re credit however, they are both better than a foreclosure. The good thing she is seeking help unlike other people ignore the situation and just walk away
Currently my home is in foreclosure with a sale date of March 30th. My husband and I put the house on the market at a short sale (we are asking 699 and owe alittle over 800). We live in Lake Forest a suburb 30 miles north of Chicago. My husband was out of work for several months and is in sales so his income has dropped significantly. Currently, he is employed and netting 7400 a month and I bring in about $400 a month. Both of our jobs have potential of bringing in more as the economy improves. We have 16,000 in credit card debt, own one car and have a payment of 435 on another. We have 3 kids ages, 12, 10 and 7. We have very little savings -we have drained everything over the years to stay in this house. We did an modification less than 2 years ago and are not approved to try again until June 2010. Currently our mortgage payment is 5700 a month which includes 1200 a month in property taxes. My question is , do we have any options of keeping the home and negotiating a lower monthly payment with the mortgage company (Wilshire Credit Corp). It seems that it would be in their best interest if the house doesn’t sell (we have had no offers) to let us keep it by forgiving enough of the debt to allow us to make the monthly.
If that is not possible and we foreclose, should we file bankruptcy??? I am so confused. And how do we every own a home again?
I hope you can help! Thanks so much!!
OK, I am a little tired of hearing that loan mods move a little slowly. I was a homeowner who did the right things. I put a down payment, had an emergency fund, retirement and college savings. However my husband lost his job…which cut our household income by 50%. Here we are a YEAR later still no job. E-fund? GONE Retirement? GONE College? GONE. Tried to get a loan mod and I have IN WRITING from the bank “The review process takes 45 to 60 days”. SIX MONTHS later after countless hours of phone calls and tears and sleepless nights…their answer? A “modification” that saved us a whopping $182 month! By this point we have fallen so far behind on everything that after all that aggravation we will lose our house anyway. Me, my husband, 2 year old daughter and 8 month old daughter will have NO HOME. We struggle everyday, having to pick and choose which meals my husband and I will eat each day so that our children can have full bellies. It’s disgusting…the banks are pigs (this is a lot from me, since I have worked for a bank for 15 years) and I don’t care what CRAP Obama is spinning…there is NO help for the so called middle class that has been spit on and kicked down to the poor house.