When a homeowner is facing foreclosure and owes more money than the properties current value in the market, they’re underwater. When this happens, families often seek other options attempting to avoid a foreclosure sale. It’s especially hard when a homeowner has no equity in the property because certain opportunities just won’t make sense. For example, people often suggest a loan modification as a solution to their problem. However, there are many reasons why this approach is not a good idea. Let’s explore this a little further.
If they’re facing foreclosure, they will have equity in the home or they won’t. If the owner has equity, it means the homeowner controls a portion of its value. The owner can determine this by subtracting the outstanding balance due with the current property market value. If on the other hand, the home is underwater, the owner does not control a portion of its value.
Loan modifications are tools lenders will use to restructure a mortgage payment in a way that’s more manageable for the homeowner. It’s useful under specific circumstances when homeowners are looking to keep their credit in good standing. If a family is dealing with a hardship banks will consider renegotiating. However, in today’s market, the banks have stringent restrictions in place making loan mod approvals more difficult. In fact, currently, banks are only approving 20% of homeowners in the situation.
People fail to understand loan modifications come at a very high price. While a bank may try to adjust your monthly payments making them more manageable, the difference will just add on to the end of the loan. In fact, it will include additional interest. If you have no equity or think of it as a controlling stake and in the home, it makes absolutely no sense. Why pay an even higher premium for something that won’t even touch the principal for many more years?
Loan modifications would once again lock down the family for many years to come with a modified payment structure that may once again become difficult down the road. Essentially, you are back to a situation that is similar to renting but at a premium price.
A far better option would be to consider a short sale. Short sales are used to help remove the family from the home and the burden of the debt that is attached. With a short sale depending on how it’s structured can relieve the family from the liability. In fact, banks are happy to work with this process because they would like to have somebody take over the mortgage and continue with the original payment plan. This process would also offer a fresh start for the current homeowner.
In conclusion, a loan modification doesn’t eliminate the money still owing. The difference will just be added onto the mortgage at the end resulting in paying even more money. It doesn’t make sense to pay a premium locking payments into many more years when the homeowners have no stake in the property. A short sale is a far better option to pursue.