A Loan Modification is an option to consider with your lender only if you really want to stay in your current home. This process requires that you complete an application and submit it back to your lender with personal financial documentation. This process can normally take up to sixty days for approval. The benefit here is that if you can afford the final outcome, you get to stay in your home.

The downside is that if there are too many strings attached you can potentially get taken advantage of for no good reason. Weight the strings attached the and over-all costs very carefully against alternatives of a Short Sale. Both will give you the option to avoid foreclosure.

Many people use the loan modification process as a stalling mechanism to ward off an approaching foreclosure date. This is an excellent tactic for that purpose but you still need an ultimate plan regarding whether to stay in your current home or sell it.

There are many risks associated with a loan modification. The primary risk is that there is no level playing field to negotiate as compared to a short sale. Yes, it is true that you can stay in your home and avoid foreclosure, but at what cost, and can you bear the cost over the long term or is this just a temporary fix.

Here in lies the problem. Unlike a Short Sale, where there are clearly defined benefits for the lender, a loan modification theoretically is like calling up your lender and telling them your problem with the hopes that they will be fair and come to your aid. Many lenders will come to your aid and they will also be fair. However, you won’t get everything you want and you will have to measure carefully the benefits.

The good news is that if you are unhappy with the terms of the final Loan Modification you can always still choose the Short Sale option immediately afterward and still avoid foreclosure with a little training and knowledge. You always have the right to break the terms of the Loan Modification and move towards a Short Sale Solution so don’t feel you are pinned down permanently with any such decision.

Here is an example of the risk that caused me to use the term “beware” in the heading.

A gentleman recently was referred to me by a local realtor. This individual was an ex military person with strong moral character and he wanted to do the right thing. He and his wife were struggling with a housing payment that had recently adjusted to approximately $4500 per month. They were imminently facing foreclosure with no plan so they called their lender and it was suggested that they apply for a Loan Modification. They completed the credit application and submitted the financial information along with a check for $10,000. Now for a little context, this family had already spent $150,000 improving the house and trailing the bid of the market down over the past 18 months in an attempt to sell it in the open market. They were told by their lender that everything looked good, and that with their check for $10,000 on deposit, a foreclosure date would not be set and they would hear right about the 60 day mark. Well, the verdict came back form the lender and if you will humor me for a minute I would like to adlib the way I interpreted the conversation.

“Thanks for the $10,000, we already cashed your check. Your new payment is now $5,500 per month”. “What, you have to be kidding?” “We were having problems paying the $4500.” “Yes, I understand sir but these are the terms of the committee and if you don’t make it we will foreclose on you and kick you to the curb. Have a nice day!”

It gets better. This gentleman was so angry it took me personally over several weeks and collectively several hours to calm him down and convince him to stop with the anger and start focusing on the solution. I told him what an old Uncle once said to me growing up. He said, “you can punch a man in the eye and it will hurt him for a week or you hit him in his wallet and it will hurt for a very long time”. Together we decided that it was only fair to punch the lender in the wallet.

This was morally wrong for the lender to take advantage of this family in this way. However, the lender’s point of view was, “they owed us the money”. The homeowner was not able to find anyone at the lender who cared enough to listen to him.

He is now proposing a Short Sale to his lender. Not all lenders are so unscrupulous. The lesson here is to proceed with caution and not with a false sense of security when requesting a Loan Modification from your lender. In the end, our man will prevail and the anger will be gone.

When you are considering a loan modification, please beware and very skeptical if you are required to put up large sums of money. There are downside risks. You know this is very true when the FDIC is advertising that they will consider Loan Modifications with no up front money.

You may simply be better off choosing the proactive path of a short sale and find another home. Lenders are machines in recapture mode and they can make it very rough on you.

GHunter

Submitted on Wednesday, October 1st, 2008 at 8:22 pm