Description: This article describes the pros and cons of short sales and loan modifications. It offers some useful tips for deciding which would be the best option for you.

When you agree to enter into a mortgage on a home, you are agreeing to abide by specific terms set out in a loan agreement. You agree to a payment schedule and a payment amount, based on the amount of the mortgage loan and the interest rate offered by the mortgage company. But what are your options when you find that you can no longer abide by the terms of the agreement? For whatever reason, if you find yourself unable to meet your mortgage payments, there are several options available.

Loan Modification
The first thing you should look into would be a loan modification. A loan modification is simply the process by which the terms of the original mortgage agreement are changed. In a mortgage agreement, the mortgage lender holds a lien on the property until the mortgage is paid off. Loan modifications that benefit the borrower are typically changes in the interest rate, or to change from a variable to a fixed interest rate. Changes could be made in the accrual of late fees and penalties or could even be in the length of the loan. A fifteen-year mortgage could be lengthened to a thirty-year mortgage. The borrower can be in default, in bankruptcy or in foreclosure when these loan modifications take place. The modifications take place at the discretion of the mortgage lender. Often, it is their financial best interest to modify the terms of the loan because it would ensure that the buyer would continue to pay the mortgage, which would be more valuable to the lender than foreclosure.

Certain criteria must be met in order for a loan modification to be considered. Those criteria can change, so it’s good to check with your lender or with your attorney to find out if you qualify for a loan modification. Loan modification is a good option for people who are basically financially stable, but who need the mortgage to be restructured in order to keep current.

Short Sale
A short sale, in real estate, occurs when the property sells for less money that the borrower owes on the home. A short sale is usually done to avoid foreclosure on a property, something a mortgage lender usually wants to avoid. In a short sale, the mortgage lender agrees to discount a loan balance because of some financial hardship on the part of the borrower. Most of the time, the mortgage lender agrees to take the entire proceeds from the sale of the home as payment on the mortgage, agreeing to forgive the outstanding difference owed by the borrower. This usually occurs when the borrower cannot afford to pay the mortgage anymore and the bank does not want to foreclose.

What’s best for you?
• Saving your home and avoiding foreclosure is the primary goal in deciding what the next step is for you and your family. If you are experiencing a temporary

What is a Loan Modification?
Loan modification is a process whereby a homeowner’s mortgage is modified and both lender and homeowner are bound by the new terms.
A loan modification is a process where one or more of the characteristics of a loan and/or its terms are adjusted because the homeowner is unable to make payments under the original terms or because the value of the property is worth less than the borrower owes.
Great I know what a Loan Modification is. What are the things to watch out for?

The Do’s
• If you work with a loan modification service, Do MAKE SURE YOU CHECK THEM OUT. Go to the better business bureau site www.bbb.org and research the company. Also asking for references is a good idea.
• If you are going to attempt to do your loan modification yourself, Do make sure you have all of your documents collected prior to talking with the bank.
• If you are going to attempt to do your loan modification yourself, do make sure you understand the loan modification process prior to contacting your bank.
• Do make sure you spend the time to write a convincing Hardship Letter. See Tip on How to Write a Hardship Letter.
The Don’t
• Don’t contact your bank’s collection department. They are only interested in collecting payment not helping you with modifying your loan. You must contact the loss mitigation department in the bank.
• Don’t stop making payments on your loans even if a loan modification advises you to. A reputable company will tell you to continue to make payments for as long as possible.
• Don’t rush through your loan modification application. It is critical that you do not make errors and that all forms you submit are correct.

Overview
Loan modification is not a new practice, however it is more common now due to the mortgage crisis, declining home values and the economic recession. When property values are remaining consistent or are rising, your ability to get a loan modification tends to be very difficult. When a home facing foreclosure has equity, the bank takes a minimal loss or no loss at all. With nothing to gain the bank has no interest in approving a homeowner for loan modification with a track record of financial difficulties. The lender can place the property in foreclosure, find a new homeowner who can make the payments on time and remain profitable. Banks do not want to engage in loan modifications or deal with a risky borrower in a stable economy.

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Declining property values combined with tougher lender guidelines and adjusting interest rates have resulted in the loan modification boom. No one is going to buy a home for 15%-30% above market value and no lender is going to refinance that property. Your mortgage, or mortgage-backed security, is the collateral for the note that a bank lends a borrower.

In the current economy, equity in homes has dwindled and, in many cases, has become negative. In lieu of foreclosure, banks would rather reduce the borrower’s mortgage payments and/or balance. Neither banks nor borrowers have power in these difficult times. In fact, banks and borrowers must work together to avoid foreclosure to not only keep families in their homes but also turn this recession around. Loan modification might mean immediate financial losses for our banking institutions, but the long-term mortgage payment losses are minimized versus mass foreclosures.

Millions of Americans have taken out high home equity loans against their mortgages in markets that were at the time appreciating but now have rapidly depreciated. Then, when the homeowner’s adjustable-rate mortgage (ARM) changes and the payment can no longer be made a bank will try to refinance the mortgage, only to discover there is little chance. Most homeowners believe their only option is foreclosure. Since they cannot make the payments, sell, or refinance, are there other options other than foreclosure? The first options that a bank gives are a short sale, deed in lieu of foreclosure, or forbearance agreement.

With so many homeowners wanting to keep their home and a vast supply of empty homes, the banks are forced to revisit their loan modification strategy. In today’s economy, banks are willing to engage in loan modification to keep people in their homes. They can reach many more homeowners by doing so and continue receiving monthly mortgage payments.

Overview
For qualified homeowners that need to renegotiate the terms of their mortgage with their lender, a loan modification is a good option when properties values are dramatically declining. Loan modifications are the best recourse for homeowners looking to renegotiate the terms of their loans, because the homeowner is unable to make payments under the original agreement or because the value of the property is worth less than the homeowner owes on the mortgage. Loan modifications also serve the needs of lenders that would prefer to avoid foreclosure and a sale of the asset at a significantly reduced price.

Refinancing is advisable in a stable or increasing market. It gives homeowners the ability to take cash out when needed, lower their interest rate, and fix their interest rate, among other options. In today’s declining market, refinancing is available to a much smaller group of homeowners — only those who are current with their mortgage payments, have a strong credit history and job security, disposable income after all bills are paid, and significant equity in their property are eligible.

Comparison Shopping
Whether you will be able to refinance or qualify for a loan modification depends on your individual situation. Most homeowners interested in making a move in this market are the ones who are in trouble and therefore do not qualify for a refinance. If you are behind on your mortgage, always attempt a loan modification first. When a homeowner is late but can show the ability to pay a lower payment, the benefits from a loan modification will greatly outweigh that of a refinance. The interest rate on such a loan modification will generally be lower than that of an on-time homeowner with good credit who pays to refinance.

Getting approved for a traditional refinance is extremely difficult. Since Wall Street is no longer purchasing loans from originating banks, lenders have cut programs to less qualified homeowners. When considering refinancing in a market where equity has evaporated, causing balances to exceed value, there is no option to refinance. This is true for all homeowners, sub-prime as well as qualified homeowners.

If you are a homeowner that is upside down, you would have no option to refinance and your best bet would be to seek out a loan modification. If you are not late but are upside down, loan modification companies such as ours can make it a seamless and transparent effort that could potentially knock tens of thousands of dollars off of your principal balance. Who could argue with that?

A  no fee refinance refers to a loan transaction where the lender or your broker bears all the charges such as settlement costs, underwriting fees, title or escrow fees, processing fees, loan origination points, appraisal etc.

So the question is how do they do that? The truth about this type of loan is that the lender bundles all of these closing cost in your loan amount. This increases your loan amount which ends up increasing your payments over the life of the loan. Lenders by law need to dislose this by presenting you with what is called and A.P.R. The A.P.R. reflects the interest rate plus all of the closing costs and thus allows you to do a head to head comparison of various loan solutions. For instance a loan having an interest rate of 6% without fees included could have an A.P.R. of 6.5% once fees are included.

While you seemingly don’t pay these expenses up front, you do end up paying it when you repay your loan. A no fee refi has one big benefit which is that you don’t have to come up with the closing costs and you could save a good amount by lowering your payments if you can get a lower interest rate. That being said, pay very close attention to the fees being charged. Just because they are being rolled into the loan does not mean they do not matter. Negotiate to lower these fees when possible and question excessive sums. Use the A.P.R. as a guide to how much you are paying in fees. The further it is from the quoted interest rate the more in fees you are paying.