Loan modifications have been a phantom for many homeowners, It is close to impossible to qualify for a loan modification. How many times we have heard someone did not qualify for the loan modification and is short selling the property now? vs. how many times someone did get approved?.
Regardless, many people put a lot of hope into the anxiously awaited new modification program recently approved by president Obama (HAMP) which is "designed to enable borrowers that meet eligibility requirements to avoid foreclosure by modifying loans to a level that is affordable for borrowers and sustainable for the long-term".
But the hopes were too high up when homeowners were even spreading rumors about a principal reduction. And I am a witness of that because one of my clients who is almost on the last stages of selling his home via short sale waited until after April 5Th (effective date of the new modification program) just because he had this high hopes on the program. I would like to clarify to homeowners that at this time there are no options on loan modifications offering a principal reduction. If someone bought a home on 2005 at peak of the market for $250,000 and now it is valued at $50,000 with a loan modification the amount due will be $250,000. Only the interest rate will be reduced to make the monthly payments more affordable. With a short sale the goal is to have the lender agree to a reduced amount of the owed principal to pay off the original amount.
With the new HAFA (Home affordable foreclosure alternative) effective also from April 5th, 2010. The lender agrees to not prosecute the borrower for the deficiency of the debt after the home is sold via short sale. There are certain qualifications to meet to make use of the HAFA. The lender will discuss alternatives with the borrower offering to do a modification first, the borrower can opt for not doing a modification saying that he or she is not able to make the monthly mortgage payments and requests a short sale, then the borrower will give 14 days grace period to the borrower to decide if they will follow the short sale proceeds under HAFA guidelines.
If the borrower does not qualify under HAFA for a short sale, then they can still perform a short sell under regular guidelines, meaning that they will be subject to all the consequences that we have been experiencing for the last 2 years, which are not much different but the main difference is that the lender has the option of prosecuting the borrower for the remaining balance after the short sale proceeds.
In my experience, out of 45 short sales last year (2009), none of them have been served yet for the remaining balance, non of the investors have prosecuted the borrower for that balance, but many of the homeowners who didn't successfully sold their homes via short sale and went to foreclosure we prosecuted for the balances after the home was sold as foreclosure.
In my opinion, it has to do with the expenses that a foreclosure represents to the bank Vs. the less expenses on a shortsale process. It is not suitable on many cases for the lender to continue on a trial for the balance. Specially because many homeowners may opt for filling a bankruptcy as last resource if they find themselves in this situation.
My advice for someone who is in default on his or her mortgage payment is to get an expert agent immediately to explain and analyze what is the best option and what are the possible consequences, what you would like to accomplish and what is causing this financial hardship. That is a more effective approach by focusing on causes and effects of the problem and of the solution. It is like taking cough medicine, you may get rid of the cough but may be bad for your heart too, at least you got rid of the cough!. Evaluation is necessary. Please be careful by selecting the real estate agent who knows the subject and has a reliable team of experts working with him or her.
Thank you for reading! best wishes.
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