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Loan modification or Short Sale! Which one is more beneficial?

Updated on November 1, 2012
Save your home from foreclosure
Save your home from foreclosure


We hear about thousands of homes going in foreclosure every day. Imagine how many home owners would be living under a constant threat of foreclosure and how many would have already faced the trauma of being thrown out of their homes. It can be agonizing, beyond comprehension, to lose one’s home, and at the same time, face social humiliation combined with bankruptcy and a damaged credit. To recover from this onslaught, can be real challenging, especially in the event of the existing economic crisis. About a year ago, when the foreclosure graph started rising, the mortgage brokers evolved a strategy of making a lucrative business out of it. They started convincing home owners to find a buyer for their property (due to be foreclosed) and plunged into a cumbersome process (on behalf of the owner / seller) of negotiating a short sale with the Lender / Bank in respect of the property. Soon enough, the Banks realized that the Brokers should be kept out of the picture, as they were reported to have misguided the home owners in several cases. lt was a wise decision as some Brokers had exhibited gross misconduct by making a ‘killing out of a shipwreck.’

Foreclosure makes you vacate your house

Show your financial hardship
Show your financial hardship

Financial Hardship

The Banks and other lending financial institutions have literally got overloaded with tons of short sale files; to save the home owners from further exploitation by the Brokers and mediators, the State Banking Departments have come up with a centralized help line number for the home owners in crisis. The State Department are still encouraging the owners / sellers to approach the banks directly and produce all relevant documents including the ‘financial hardship letter’ which happens to be the most important and pertinent document in such cases. In fact the entire decision of permitting (or not) a short sale depends on the way in which the said letter is drafted. Attorneys are best suited for this job and in fact the brokers also engage Attorneys to make a short sale package ready for submission to the lender. They get their commission from the banks and not from the owner / seller. I used to witness the home owners being tutored with the benefits of executing a short sale, almost every day. They used to be told that if they let go their homes, they would not have to face the foreclosure anymore and would also be absolved of all the debts which they owed to the banks. Another advantage was that they still had a chance to rebuild their credit gradually over a period of time. Sounded like a win-win situation. Who really benefitted out of the situation, was an issue worth considering. The Banks ended up wiping off the seller’s debts and in turn got almost one-third of the amount which they were actually entitled to. The home owner lost the house for all times to come. The only beneficiary seemed to be the buyer who bought the property in a short sale.

You don't have to vacate your house
You don't have to vacate your house

Loan Modification

As against short sale, a home owner is given a chance to renegotiate the terms of repayment with the lender / bank so as to make the monthly payments affordable. The banks try to chalk out a new payment plan with reduced rate of interest but it involves a catch which many people do not know. The loan terms are modified only for a period of five years after which the Banks revert back to the initial terms of payment. So what is the point? This strategy has been evolved to facilitate the home owners for at least a period of five years so as to lend them an opportunity to save their house from going into foreclosure. At least this way some relief is given to the owner in as much as he can retain the house and gets some more time to straighten out his payment schedule. The Banking Departments have been trying to strategize techniques in favor of home owners and to the detriment of the mortgage brokers and the investors / venture capitalists. I personally feel that anyone who is living with a ‘sword of Damocles’ on his head and fearing that it might fall any time, should find out best possible means to save the house for which ‘loan modification’ is the only way out, as on now. The modification process is, however, subject to production of all relevant documents including the pay stubs or W2’s. The lender wants to be sure that the owner is capable of paying the revised monthly mortgage.

The decision, as to which 'bail out' option suits, ultimately rests with the home owner.

Loan Modification


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    • profile image

      workoutmods 7 years ago

      loan modification is getting harder and harder to get I am helping homeowners to save their home today at

    • seanwilder profile image

      seanwilder 9 years ago from Enfield, CT

      You may be interested in this awesome short sale management system that I have been using. Even if you already have something, I bet this will blow it away. Check it out at

      And great post.

    • anjalichugh profile image

      anjalichugh 9 years ago from New York

      Steve Rensch: I perfectly understand your predicament and I feel sorry for all that stuff you have / had to undergo. It might be pertinent to mention here that I too was involved in short sale and loan modification some time back and I had been able to assess the whole process and the intricacies involved from a close range. However, as you know every article has a kind of 'shelf life', this hub, too, may not seem to be up to date with current information. The reason being that this was written at a time when loan modification had just started to be on the rise; its implications were seen at a much later date. For updating info on this I might have to write a follow up hub. You probably stumbled on this page a long time after it was written. I hope this explains your concerns. Thx for coming back.

    • Steve Rensch profile image

      Steve Rensch 9 years ago

      First, I apologize for my tone in the last comment. That was due to my own stuff here at home and also my scan through the home loan section, which is overflowing with lender propaganda about loan modification. I have seen so many lives ruined by loan modification that it is a little tough for me to stay cool. I too am a lawyer, and as you probably guessed, I sometimes do short sales. Or did . . . contrary to what you suggest, they are so unprofitable in rapidly declining markets (where most the foreclosures are) that they are not worth doing much of the time. I used to offer loan modification as well, before all these companies came out of the wood work. But right off the bat, I began experiencing distressed sellers who had only a few thousand left before auction, gave it to the loan modifier, never heard from the modifier again, and in the course of waiting, lost the time they needed to do a short sale. So then they not only lost the house but took on 7 years of financial dysfunction. (Why didn't you point out that very significant difference between short sale and foreclosure: 7 years out of the credit game vs. 2 years?) I also discovered that loan modification is above all a BANK scam. (Which is why they are now promoting it to such a degree.) They know statistically that a person who defaults on the original loan is going to default on the new agreement as well, unless the terms of the new agreement are substantially more beneficial, which they never are. So what happens in most cases is that either the homeowner walks away from the offered deal because he sees how absure it is, or he enters into it, defaults within a few months, and the bank has suddenly pulled in an extra few thousand dollars and gotten its foreclosure anyway. So I stopped offering loan modification. And my body hurts every time I see a bandit sign or ad bragging about substantial reduction in monthly payments or a 95% success rate or whatever. As far as I'm concerned, all of these people (including the bankers) should go to jail. It may be, Anjalichugh, that you have heard things to the contrary. But unless you have been in the trenches on a daily basis with distressed sellers and lenders, as I have, I submit that your information is suspect.

    • anjalichugh profile image

      anjalichugh 9 years ago from New York

      Secured Homeowner: Thx for visiting.

      Steve Rensch: I think you are endorsing my view only. Where do we differ? Am I missing something here? What truth have I concealed here? I'm sorry if I didn't understand.

    • Steve Rensch profile image

      Steve Rensch 9 years ago

      The sad thing is that the commentators to this blog believe you. Neither they nor you spend your day on the phone with lenders trying to get them to somehow give some mercy to distressed sellers, as I do. I have yet to see that mercy. I have watched the lenders throw people out unnecessarily despite terminal illness and distress caused by others and even the bank itself. Loan modification has done nothing but bring the cons out of the woodwork. And I have watched realtors give lenders exaggerated numbers for fair market value in order to block short sales so that the house would go to foreclosure and the realtor would get the REO listing. How these people live with themselves I don't know. But putting the blame at the feet of investors is specious and lazy, appealing to the need for people to find a "boogeyman".

      Finally, if your piece is to have any integrity, you need to tell the truth about your personal connection with the lenders.

    • profile image

      Secured Homeowner Loan 9 years ago

      All of us know that investing in property is a huge asset. Everyone who has made that investment is entitled to consider taking out a Personal Loan for Homeowners when facing financial problems in order to deal with your pecuniary crisis. By:

    • anjalichugh profile image

      anjalichugh 9 years ago from New York

      mike: Thx. You're welcome

    • profile image

      mikeq107 9 years ago

      Hi Anjali :0)

      Great Hub and information!!!!

      Mike :0)

    • anjalichugh profile image

      anjalichugh 9 years ago from New York

      cgull8m: It's good that Government intervenes in some situations. Too much of power in the hands of some selfish people can really have serious effects. At least there isn't much scope for explotation of innocent people now, as all the Banks have come forward to help home owners directly without the need of any mediators.

      Thx for reading.

    • cgull8m profile image

      cgull8m 9 years ago from North Carolina

      "This hub can be an eye opener during financial crisis. It's also very sad that there are many people who take advantage of others during their most vulnerable moments."

      I agree with BeatsMe, great hub, it is just sad both are at fault for all this mess. A family needs a home at least for the children. Whatever it is we have to make sure this doesn't happen, GOP didn't want regulation and this happened.

    • anjalichugh profile image

      anjalichugh 9 years ago from New York

      Fran: I feel the same way. God bless.

    • Fran Horvath profile image

      Fran Horvath 9 years ago from Universal

      Well, all I can say is we are connected somehow! Thank you for all of your contributions. I am truly blessed to know you.


    • anjalichugh profile image

      anjalichugh 9 years ago from New York

      Nancy Niche: Well said. It's sad to see how self centered human race has become. Every one seems to think of his own interest first. But there are good people too; one has to be vigilant enough to pick up right people. Trusting someone blindfold could lead to serious problems.

      Thx for visiting

    • profile image

      Nancy's Niche 9 years ago

      This quote sums up the cause of our financial and economical fall;

      "Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor." On Greed---Thomas Jefferson 1743-1826 Third President of the USA

    • anjalichugh profile image

      anjalichugh 9 years ago from New York

      Brian & BeatsMe:

      It is definitely a trying time and we should try to (at least) guide people properly if we cannot help them financially.

      Thx for visiting.

    • BeatsMe profile image

      BeatsMe 9 years ago

      This hub can be an eye opener during financial crisis. It's also very sad that there are many people who take advantage of others during their most vulnerable moments.

    • BrianS profile image

      Brian Stephens 9 years ago from Castelnaudary, France

      Good information for people at a very trying time in their lives.


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