Short Sale vs. Loan Modification vs Bankruptcy
Short Sale vs Loan Modification vs Bankruptcy
A friend recently told me his house is in foreclosure. No matter how many times you hear about the subject it has an impact on you when it is someone you know! He asked me if he should let his house go back to the lender or should he try to save it. That would be a hard decision if I was in his shoes. Short sale, loan modification or filing bankruptcy. The common denominator is income stability.
I am still thinking about his question and decided to research the following options:
- Short Sale
- Loan Modification
- Chapter 13
A short sale often occurs when a homeowner/borrower cannot afford to pay the mortgage on their home, but the bank/lender agrees to allow the house to be sold to an buyer or investor short of what the borrower owes. The homeowner and the bank/lender agree to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit score outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.
A loan modification is is a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower (i.e mortgagor and mortgagee). In general, any loan can be modified.
Currently the Obama Loan Modification program is available to assist up to nine million homeowners avoid foreclosure. The plan has been increased to for Fannie Mae and Freddie Mac to more readily refinance and purchase mortgages.
Bank of America has granted the least HAMP mods to about 21% of potential eligible borrowers. The other Big Four banks have done better:
- Bank of America HAMP mods given to 21% of potential eligible borrowers
- Citigroup HAMP mods given to 44% of potentially eligible borrowers
- Wells Fargo HAMP mods given to 37% of potential eligible borrowers
- PMorgan Chase HAMP mods give to 32% of potential eligible borrowers
- 43% of the 524,695 homeowners who’ve had their trial modifications canceled by one of the eight largest servicers have been granted an alternate modification. That’s the case for just 26% of Bank of America’s trial cancellations.
And the Big Eight have granted alternate mods to 30% of people rejected from HAMP trials. Only 13% of Bank of America’s HAMP trial rejects have had such luck.MP mods give to 32% of potential eligible borrowers
HAMP is supposed to give borrowers who are in default or at risk of default a chance to modify their mortgages and reduce monthly payments, usually by $500. Eligible borrowers are put into three-month trial modifications, and if they make their payments the trial mod is supposed to become “permanent” for five years. However, HAMP is notorious for long trials that confuse borrowers and in some cases make their situations worse.
In most cases, an automatic stay is entered as soon as a Chapter 13 bankruptcy petition is filed. The automatic stay should temporarily stop foreclosure, along with all other collection action, regardless of the stage of the foreclosure proceedings.
With the automatic stay in place, the debtor and his attorney have enough time to work out a Chapter 13 repayment plan.
I don't know which option my friend will choose. He is depressed I could see it on his face when he spoke. He is thinking of not taking action until its too late, "I just may wait for the Sheriff to show up and place my belonging outdoors". We live in a judicial state which means an eviction may take would be at least 2 years after he receives notice.
However, with the options I have listed, I hope he decides to take action on at least one of the them, that is before the Sheriff shows up at his door.