Short Sale VS Loan Modification

Services for Real Estate Pros

Why a Short Sale is a Better Option Than a Loan Modification

One of the hardest things that you might experience is losing your home that you have worked so hard for. This is actually a problem that many property owners are experiencing nowadays, what with all the financial problems plaguing the country. The possibility of facing foreclosure or even bankruptcy does not only strip you off your ownership of your home; this also damages your credit score and subjects you to embarrassing situations.

While you might think that foreclosure or bankruptcy is the only way out of the financial pinch that you are in, you actually have better alternatives. The most commonly preferred options by most home owners facing foreclosure on their properties are the short sale process and loan modification. These two alternatives have helped a lot of property owners walk away from their financial hardships with their dignities intact.

If you are facing foreclosure on your home, you might be asking yourself whether to go with a short sale or to choose loan modification. While loan modification may be a viable option, a short sale has several benefits and advantages over the former. If you are still undecided on which alternative to choose, here are some of the differences, the benefits, and the advantages of a short sale VS loan modification.

What a Short Sale is all about

With a short sale, the lender accepts a cash payment on your property that is less than the amount of the remaining balance on your mortgage. For instance, if your mortgage balance is $250,000, the lender may accept a discounted payment of $200,000 from a buyer. If you no longer have the ability to keep making payments on your mortgage and if you do not have the desire to keep living in your current home, a short sale is the better option for you.

The process of short sales usually requires the assistance of a Realtor to help you sell your property. Your Realtor will help you find a buyer and negotiate the transaction with your lender. The lender will then approve and accept the offer made by a potential buyer once you and your short sale agent have reached an agreement. This is why it is very important that you look for a reliable, professional, and experienced Realtor that will assist you throughout the short sale process. Make sure that the short sale Realtor you are going to be in a business deal with is experienced in handling short sales.

short sale serviceNot being able to pay your mortgage may be a result of several things that happened to you. These may be due to a recent divorce, the death of your partner, extended illness, or if you have been jobless for a long period of time. The financial institution responsible for handling your mortgage is more likely to accept a short sale on your property if you have tried your best to make your mortgage payments.  The most important benefit of a short sale is that the borrower is typically forgiven of their debt, and is no longer stuck with a loan that is more than the value of their property.  After a short sale, a borrower can also typically qualify for a new loan on a property in only two years.

What a Loan Modification is all about

On the other hand, a loan modification is the process of a lender agreeing to change a part or some parts of your loan terms in order to make it easier and more affordable for you to repay your mortgage loan. This option allows you to keep your home by making regular payments. If you are only behind on your mortgage payments because of a single incident or a problem that can easily be resolved, then loan modification is a better choice. However, this also means that your loan terms are extended, which results in a longer period of paying for the loan interest.

The Differences and the Advantages of a Short Sale VS Loan Modification

Before you make a decision on whether to choose a short sale VS loan modification, or vice versa, you need to understand the differences between the two first. Taking a closer look at these differences will help you find out which is the better option that best suits your preference, your needs, and your current financial situation. This will also assist you in making the wisest choice.

  • One of the major differences of a short sale VS loan modification is that you no longer have to worry about paying more on the mortgage of your property. Since you are signing away your contract and the ownership of your home, this means that your remaining mortgage balance is already paid for and can be forgiven.
  • Another difference and advantage of a short sale VS loan modification is that you do not have to keep paying for the interest rate on your loan. Once your property has been sold through a short sale process, you no longer have to worry about interest rates or other fees. On the other hand, with a loan modification, you are extending the terms of your loan, which means that the longer your payment terms are, the more interest you have to pay for.
  • Another advantage of a short sale VS loan modification is that the lenders are giving you the chance to recover from your financial hardships. With a short sale, you can walk away from your debts and not owe your lenders any more money. With a loan modification, you still owe your lenders a significant amount of money that they expect you to return. Aside from the mortgage balance you still owe them, you also have to pay for interest.  This is not beneficial to the borrower if they are in a negative equity position.  Having a loan that is greater than the value of the property is not beneficial, regardless of the interest rate or terms.
  • Few loan modifications offer permanent solutions.  The best analogy for this situation is like putting a band aide on a hemorrhage.  The loan modification is many times only a temporary solution, and are usually just an attempt to buy more time in the property. 
  • Since you will be given the chance to get out of the financial pinch that you are in if you put up your property for a short sale, this means that within a couple of years, you will be able to afford purchasing a new home. This new home may even be better than the property you put up for sale. This is one of the advantages of a short sale VS loan modification, since with the latter; the value of your property may further decrease over time.

Now that you have a basic understanding of the differences, the benefits, and the advantages of a short sale VS loan modification, you may now choose which one is the best option for you.

For more information on short sales contact a specialist today!

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Keith Ritter 01/27/2013 01:10 AM
  2. Winston Heverly 04/27/2013 10:36 PM
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Tamara Schuster
Naperville Glen Ellyn Lisle Plainfield Wheaton Illinois - Naperville, IL
Realtor Broker - Naperville

This is a nice blog. Now loan modification works when you want to keep your home and can affod to do so under the right terms.

Thanks for posting.

Dec 07, 2011 11:17 AM #1
Mike Linkenauger
Jacksonville, FL
Short Sale Specialist Network

I do agree Tamara.  Loan modifications are much easier to qualify for now when compared to a few years ago.  The unfortunate reality however is that almost all loan modifications will leave a borrower stuck in a negative equity position.  The "right terms" don't make financial sense in most cases.  You can modify a loan into a 100 year loan with a 1% interest rate, and it doesn't get rid of the fact that the borrower is still 100K upside down or more in many cases!  Better to cut losses with a short sale, and repurchase a comparable home for current market value two years later!  It doesn't make sense to stay stuck in a negative equity position if there is another way out.

Dec 08, 2011 02:54 AM #2
Scott Taylor
Realty Center - Orlando - Ocoee - Orlando, FL

Thanks for this great article Mike. Found it on Linkedin first. I'll reccomend it for a featured article. Hope to see you on the cruise if I can save up enough money in time!

Dec 11, 2011 03:13 AM #3
Maria Gilda Racelis
Home Buyers Realty, LLC-Manchester, Bolton. Vernon,Ellington - Manchester, CT
Home Ownership is w/in Reach. We Make it Happen!

Suggested: and bookmarked. Very informative.


Jan 26, 2013 09:50 PM #4
Beverly Herdman
Keller Williams Realty - Culpeper, VA
Northern VA Wine Country Experts

great points and well said! It is frustrating to me when folks want to modify and it is clearly not in their best interest in the long run. They still owe what they owe in most cases. At some point in there lives it will have to be short sale anyway. Why prolong?

Jan 26, 2013 11:12 PM #5
Mike Schneider
10 YRS with Active Rain ! - Lake in the Hills, IL

Any explanation helps clarify the complicated and confusing pre-foreclosure process. You did an excellant presentation and i think you for sharing.

Best wishes

Jan 26, 2013 11:29 PM #6
Michael Deery
Citywide Financial Corp - Pacific Beach, CA
Very few people qualify again after 2 years, only VA allows 2 years after a short sale, and Fannie Mae requires 20% and strong credit after the short sale to repurchase after 2 years! A loan mod is great option if their principle reduction, if you don't get princple reduction, then a short sale should be considered!
Jan 26, 2013 11:40 PM #7
Linda Just

I am certified SFR, Short Sale and Foreclousre Resource agent. I agree about the differences Mike states.

Although, I'm finding out only now, some homeowners are not aware of the the HARP 2.0 program and continue to pay higher interest rates than they need if they would only contact their bank andit's a Fannie of Freddie loan. Many under water mortgages can be re-fi'd through your Bank under the HARP2.0 program. This is an opportunity for the owner who has NOT MISSED A PAYMENT. You do not need to show a hardship. Only that you are under water and mortgage is before August 2009.

Many short sales will be approved in the next couple of years here in Florida.

Good luck to all!

Jan 27, 2013 01:00 AM #8
Nancy Middleton
Counselor Realty, Inc. - Excelsior, MN
Nancy Middleton, Counselor Realty, Minnetonka, MN

Mike:  Good explanation re: the differences. The bottom line for me is to consider the individual situation and how much background and understanding the Seller has regarding how they got to their underwater situation (such as medical devastation, divorce, death, senior citizen etc). and how capable they are of understanding and following the necessary procedures for the remedy, as well as the relationship and trust you have with each other.

In my most recent case, I was glad to be the Realtor who was referred to the client with a trusted level of confidence already established. Then I elected to hire a legal firm highly recommended by agents in my office to handle all the paperwork and explanations about how this particular difficult lender usually handled their cases and how to procede. I got the townhome priced right, got it sold in three days, and was able to work with the other agent as a team to keep both my seller and her buyer doing what was needed.  From the time of the listing through to the closing took exactly three months and the short sale was done with all the correct legal paperwork to end the seller's financial problems,  confusion, and embarassed pain so she could move into a wonderful hardship low rent senior building. It was a lot of hand holding on my part, and she is forever grateful for how everything was handled. That was worth every penny of the meager amount of money I made. 

Jan 27, 2013 01:04 AM #9
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

I'm wondering how you can justify a new home purchase after a couple of years after a short sale? A homeowner after a couple of years is going to save for a down payment on a new home, is that realistic or are they relocating to another state or area?

Jan 27, 2013 02:00 AM #10
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

If homeowners can swing a short sale it will be better than foreclosure. However, if they do a loan mod they should expect to be froeclosed on because the lender won't wait for them to short sale if they've been denied loan mod or new terms are unsatisfactory to the borrower.

Jan 27, 2013 06:21 AM #11
Mike Linkenauger
Jacksonville, FL
Short Sale Specialist Network

Thanks for all for commenting! Please "suggest" it to be featured if you would!  There is so much misinformation out there around the internet and media.  Most home owners are not thinking about the long term, they are just thinking "I want to keep my house, so lets do whatever we have to do to try to keep my house.  Even though there have been some great modifications over the past few years, very few do anything to address the negative equity plaguing millions of home owners.  Short Sales seem to be the best long term solution in most cases.

Jan 27, 2013 09:36 AM #12
Sherry Swift

Great post. I found it very informative and useful and I learned things I didn't think of myself or read anywhere else. Thanks for the great post.


Jan 27, 2013 11:42 AM #13
Bob Miller
Keller Williams Cornerstone Realty - Ocala, FL
The Ocala Dream Team

Hi Mike, great post and info.  We are sure you have used it in the Jax area.

Jan 27, 2013 06:45 PM #14
John DL Arendsen
Crest Backyard Homes "ADU" dealer & Contractor

Loan Mods are a bandaid at best. When I wrote a 3 part series on LMs in '09 they had a 65% failure rate within the first 6 to 8 months. You're right the best thing you can do is a short sale and get on with your life. I'd like to share one of my posts with you if you don't mind.

Jan 28, 2013 02:11 AM #15
Paddy Deighan JD PhD - Vail, CO
Paddy Deighan J.D. Ph.D

the statistics support the short sale vs. loan mod conclusion....65% of loan mods subsequently default anyway

Jan 31, 2013 03:50 AM #16
Johnny LeRose

Even though Loan Mods have seemed to improve, there is nuch more than meets the eye. Besides what everyone else commented on, which is all, quite valid & relevant, Loan Mods, in many cases, might not be the best option, yes, simply another band aid, putting off the inevitable & sometimes, only making things worse. One should absolutely look into Loan Mod, but it should be looked at, with a wide eyed investigation. A skilled & experienced Realtor, may be able to project into the future, certain challenges that might come up, that one would not have looked at.

A lot of times, I feel we look into Loan Mods, the same way many of us looked into purchasing a home, esp. during the boom, with a short sighted, I want it now, "Immediate Gratification,"attitude, the very same attitude that contributed to designing this morass that we're in, in the first place. We need to learn our lessons & "sober-up" & use reason & rationality, if we are to have a victorious & dignified solution.imho


I Can Help! Johnny LeRose, Realtor, CDPE, CIAS 

Feb 11, 2013 08:24 AM #17
Johnny LeRose
Exit Silan Real Estate - Edgewater, NJ
I Can Help!

Even though Loan Mods have seemed to improve, there is much more than meets the eye. Besides what everyone else commented on, which is all quite valid & relevant, Loan Mods, in many cases, might not be the best option, yes, simply put, another bandaid, putting off the inevitable, & sometimes, only making things worse. There is a high rate of homeowners obtaining loan mods, only to go into default, maybe in 3 months or so, facing foreclosure, & in many cases, again.

One absolutely should, look into a loan mod, and for a few, it could work, but it should be looked at, with a wide eyed investigatory manner. A skilled, experienced, educated & informed Realtor, may be able to project into the future, certain challenges that might come up, that one would not necessarily have looked at. Remember, there is a lot of emotion at play here, too, much more so, than when simply buying or selling a home, not as a distressed homeowner/family.

A lot of times, I feel, we look into Loan Mods, the same way many of us looked into purchasing a home, especially during the last "Boom," with a short sighted, "I want it now!," Immediate Gratification attitude, the very same attitude that contributed to designing this morass that we're in, in the first place. We, personally & as a society,  need to learn our lessons & "sober-up" & use reason & rationality, if we are to cause a victorious & dignified solution. imho


I Can Help! Johnny LeRose; Realtor, CDPE, CIAS

Feb 11, 2013 08:57 AM #18
Karen Deis - Minneapolis, MN
When In-house training is not enough!

Great article - I'd like to add that the borrower needs to get a specific statement (when short sale) that the lender will not file a deficiency judgment either.  Oh, and second homes have their own set of rules when it comes to short sales and loan mods.

Feb 11, 2013 11:01 PM #19
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