Short Sale vs. Loan Modification; Weighing the Options
As a REALTOR® specializing in negotiating short sales for homeowners who owe more than their property is worth in today’s market, I am often asked if loan modification is an option. The answer in short, is YES, albeit with a few caveats. Negotiating a loan modification is a very similar process to negotiating a short sale and I am happy to report that the AZ Short Sale Team finally has a few success stories to report for clients who found themselves having trouble making their monthly house payments, but who wanted to stay in the home. (More on this later.)
In order to successfully negotiate a loan modification, the homeowner must be able to demonstrate that their current payment is greater than 31% of their gross monthly income. That’s not all, however. They must also be able to document sufficient income to support a reduced payment. In other words, you can’t be broke. If you’re broke, then your best option is probably a short sale. But, if you have a steady, documentable income and can prove that you can afford to make a reduced payment, then loan modification may be a viable option.
The most common question that follows “Is loan modification an option?” is “Will they reduce the principal balance?” The answer, in short, is NO. In fact, a recent article published on CCNMoney.com reported that the HOPE for Homeowners program which was intended to prevent foreclosures by giving lenders incentives to reduce the principal balance of loans to 90% of the current market value of the property, has saved just ONE family from foreclosure in the five months it has been in effect. Seriously, just ONE family has benefited from a program expected to help over 400,000 families! The bottom line is that lenders are far more willing to reduce the interest rate on a loan – to as low as 2% for several of our recent clients – than they are to take the loss on the property unless you’re willing to give up the house (sell via short sale).
While loan modification is the right choice for some, many others feel that a reduced monthly payment simply isn’t enough. Many who bought during the “boom” years have as much 50% negative equity in their homes today. For a homeowner who paid $300,000 for a house that is worth just $150,000 today, a smaller payment simply won’t suffice since it will still be nearly fifteen years before the property is worth the original purchase price.* For households that need to move for employment or growing families, for example, staying in a home for the next fifteen years in order to make up for negative equity just doesn’t make sense. After all, even the minimal impact that a short sale will have on a borrower’s credit score will be wiped clean long before the home appreciates to its original “boom” value.**
If you own a home with negative equity, please contact us at LoanHelp@AZLifestyleTeam.com to schedule a free, no-obligation consultation. We will be happy to discuss your individual situation and help you explore the options available to you.
*At an annual appreciate rate of 5%
**In most cases