Why Would Anybody Ever Do a Loan Modification?

Almost every short sale I handle in Sacramento is a rejected loan modification. So, it is rare to have sellers call to say the bank has offered them a loan modification in the middle of a short sale but sometimes it happens. When they ask for my opinion, should they do a loan modification or a short sale, that's really up to them.

I do caution that they consider the fact they might be just kicking the can down the road. I suggest they get legal and tax advice. Loan modifications should include a principal reduction to be truly favorable to a homeowner, and most of them do not. In fact, some loan mods increase the principal balance. I find that many people have short vision and make decisions based on today not tomorrow. In some cases, that's how they got into their financial mess in the first place. Short vision.

I say look down the road 2 years. If your home is worth $150,000 today but you owe $300,000, you'll still owe close to that amount two years from now and your home will probably still be worth $150,000. However, if you completed a short sale today, kept your credit in check, you could probably qualify to buy another home in 2 years, just like your home for much less. With 20% down, you'd owe only $120,000 on it. Where do you want to be in two years? Still underwater? Or in a new home with perhaps a mortgage of $120,000?

Of course, if you have no plans to move for 20 years, taking a loan modification can make a lot of sense. For example, a bank just offered my clients a loan modification at 2% for 6 years, then 3% for the remainder. They owe $330,000, the bank is adding their back payments to the loan and increasing the balance to $335,000. Their mortgage payment dropped from $2,200 to $1,200. They are saving $1,000 a month. Over 10 years, that's a savings of $120,000. Of course, they will probably still be underwater at that point. But if they aren't planning to move, what difference does it make?

As a Sacramento short sale agent, I still have to do what is best for my clients. For some clients, even though I may personally disagree, what's best is doing a loan modification.

Photo: Big Stock Photo

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Elizabeth Weintraub is an author, home buying columnist for The New York Times-owned About.com, a Land Park resident, and a Land Park real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento. Weintraub is also a Sacramento Short Sale agent who lists and successfully sells short sales throughout Sacramento. Call Elizabeth Weintraub at 916.233.6759. Put 35 years of real estate experience to work for you. Broker-Associate at Lyon Real Estate. DRE License # 00697006.

The Short Sale Savior, by Elizabeth Weintraub, available through bookstores everywhere and at Amazon.com.

Photo: Unless otherwise noted in this blog, the photo is copyrighted by Big Stock Photo and used with permission.

The views expressed herein are Weintraub's personal views and do not reflect the views of Lyon Real Estate.

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