Loan Modifications and Short Sales

Consumers are getting shelled with letters, radio ads and offers from lenders and companies to modify home loans and “consolidate” debt. I could devote an entire blogosphere to how misleading I think most of these ads are, presenting their listeners with the illusion that the company has an inside track on “the new law” that they can use to help them.  Another growing industry are those who claim to be short sale or loan modification experts.  It’s the same bill of goods: stay tied to debt you can never afford to repay.

How many times do these commercials warn you not to file bankruptcy?  I often wonder if they are trying to imply that you will lose your home if you file for bankruptcy.  In the vast majority of cases, you can file bankruptcy and keep your home and avoid foreclosure. What I hear when the ads warn you to not file bankruptcy is: don’t file bankruptcy until we’ve capitalized on your fears and taken every last cent from you before you have no other choice but to file bankruptcy.

Your best bet when considering a loan modification, or a short sale, is to work with your bank or lender directly.  Anybody in the middle will just increase your debt.

Loan Modifications

You’ve received that promising letter in the mail from your lender or third-party program to save your home: now what?  Go ahead and try,  but expect a long, drawn out process and a lot of red tape.  Less than 10% of mortgage negotiations are approved for a reduced mortgage rate and at least half of those fail less than a year after the modification.   Many report getting foreclosed upon during the process of negotiation the loan.

Talking heads on the television will tell you that a bank will do anything to avoid foreclosure.  Not true.  Most mortgages are insured and the bank cashes in on these policies when a house goes into foreclosure.  The bank often chooses the route that leads them to a more secure bottom line.   The banking industry does not sail their collective ship with a moral compass to reduce payments to keep you in the home.  The majority of people who successfully get a mortgage loan modification end up going into default soon after.  There are exceptions, but be forewarned.

Short Sales

A short sale is where the bank agrees to allow you to sell your home for less than what you owe the bank.  I think they call them short sales because it’s designed to leave the seller short.  Watch out for short sale brokers, who you may end up wasting a lot of money on if the bank refuses to work with them.  It is best to negotiate your short sale price directly with the bank.  One of the dangers a short sale may bring you is that you will be responsible for any deficiency.

So, what’s in it for you?  You can avoid foreclosure and there is the possibility that it may give you favorable treatment for future credit.  Surprisingly, walking away from the home via foreclosure can be a better alternative than dealing with a deficiency (provide they waive it via the foreclosure) than the nightmare of waiting month after month for a bank to approve the sale only to grant you the privilege of owing them a deficiency after the sale.

Why Loan Modifications and Short Sales May Not Work

It’s hard to tell folks sometimes, but there is a real possibility that some people cannot afford to keep their home, and no loan modification or short sale will change that reality.  Debt counseling or working with our office can reveal a budget and give people  ideas on how to move forward.  There are options that wont involve increasing your debt load through debt consolidation schemes, loan modifications and short sales, and if you are faced with a difficult decision concerning your house, call our Wausau office for an free initial  bankruptcy consultation.