Short Sale Vs Loan Modification

For those who are facing financial tough times, making the payments on your mortgage can become difficult. Unfortunately, too many people have lost their homes because they couldn't make their payments. For those who have undergone foreclosure, the ramifications are long lasting and being able to purchase a new home may be impossible given the hit to their credit rating.

There are however a number of options available for homeowners who are facing the prospect of foreclosure. It's important to remember that the sooner you take action, the more likely it is that you can get out of this dire situation with your credit rating intact. The biggest mistake that most homeowners make is waiting too long with essentially forces foreclosure. The time to act is when you know that making your next payment will be impossible. This gives you the time to find other solutions.

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Two of the most common means of dealing with the prospect of foreclose are short sales and loan modifications. Each of them has their advantages and disadvantages, but both are solid options for homeowners looking for a way out.

Short Sales

A short sale is essentially a pre-foreclosure sale where the homeowner sells the property for a price that is agreed upon by the lending institution. Short sales are often less than the amount that is owned on the mortgage which is why such negotiations must take place with the lender.

Short sales are generally quite quick as well with the emphasis on paying off the loan quickly. However, even a quick short sale may still affect your credit rating depending on whether it was reported or not. Although, even if the short sale was reported, you can purchase a new home with FHA or Fannie-Mae loans in as little as 3 years maximum while a foreclosure keeps you from being eligible for up to 7 years.

Loan Modifications

Loan modifications have become more popular in recent years thanks to new Federal programs. Such loan modifications can lower the overall interest rates, rework the terms of a loan or even forgive a portion of the principle balance. Loan modifications can even provide a temporary break from making monthly payments as well which gives time for homeowners to adjust their finances and begin payments again.

On the plus side, you keep your home and your credit will not suffer. However, you do have to qualify under the guidelines of these Federal programs which may be difficult depending on how much you own and the specific circumstances that you are in. One big negative is that you must be employed which rules out this option for those who have lost their jobs.

Short Sales vs. Loan Modifications

In the end, you should probably look at making loan modifications first although you will want to move quickly since waiting can hurt your chances at making a proper short sale. Appropriate Federal programs can be quickly checked to see if you qualify. If you do, then loan modifications are the proper option.

However, if you do not qualify for loan modifications, then you will want to start the short sale process quickly. Remember that the earlier you act, the better your chances of keeping your home or at least protecting your credit.

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