Mortgages & Home Loans Managing a Home Loan Foreclosures and Short Sales The Benefits of a Loan Modification vs. a Short Sale By Elizabeth Weintraub Elizabeth Weintraub Facebook Twitter Elizabeth Weintraub is a nationally recognized expert in real estate, titles, and escrow. She is a licensed Realtor and broker with more than 40 years of experience in titles and escrow. Her expertise has appeared in the New York Times, Washington Post, CBS Evening News, and HGTV's House Hunters. learn about our editorial policies Updated on January 26, 2022 Reviewed by Doretha Clemon Reviewed by Doretha Clemon Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder. learn about our financial review board Fact checked by Aaron Johnson Fact checked by Aaron Johnson Aaron Johnson is a researcher and qualitative data/media analyst with over five years of experience obtaining, parsing, and communicating data to various audiences. He received a Master of Science in Social Anthropology from The University of Edinburgh, one of the top-20 universities in the world, where he focused on the study of emerging media. learn about our editorial policies Share Tweet Pin Email Photo: Big Stock Photo Whether you should favor a loan modification over a short sale depends, in part, on the following: Your financial situationThe willingness of the bankYour desire to keep your home It becomes further complicated if the bank refuses to consider the present market value of your home. If you truly want to stay in your home, regardless of its value, then a loan modification might be the better option. Terms of a Loan Modification The goal of a loan modification is to reduce a homeowner's mortgage payment and make that payment affordable. This is accomplished by implementing one or more of the following: Lowering the interest rateExtending the term of the loanAdding unpaid interest to the principal balanceReducing the principal balance Data from The Office of the Controller of the Currency (OCC), which regulates national banks, suggests that many loan modifications do not reduce the principal balance owed. Perhaps more disturbing is the news that a large number of loan modifications soon become delinquent again. It's often just a temporary fix and not a long-term solution. Loan Modifications May Result in an Increased Payment This may sound bizarre to you and contrary to how a loan modification is supposed to work, but not every bank will offer a loan modification that lowers a homeowner's mortgage payment. Some banks will offer a loan modification that increases the payment. Bank use ratios, often capping a certain percentage of your gross monthly income, to determine a new mortgage payment. If the financial statement warrants, the bank may ask for a higher payment. Temporary Loan Modifications Be aware that some banks are offering a temporary loan modification. This means a bank will not agree to make a permanent loan modification but may instead offer the following conditions: The principal balance remains the same.Homeowners are asked to make a new reduced payment.The term for the new payment is set for 3 to 6 months.The implication is if the homeowner makes the new payments on time during the temporary loan modification term limit, the bank may grant a permanent loan modification. However, at the end of the term, the bank is also free to say: "Thank you, very much, for giving us some money, but your loan is now in default." And the bank could proceed to foreclose. The author has heard this story from several Sacramento clients who were forced into a short sale by this maneuver. Banks Do Not Process Short Sales Simultaneously With a Loan Modification Most banks will not open two files at the same time. You will need to decide in advance whether you want to pursue a loan modification or a short sale. You should chase one or the other. A bank will close out a pending short sale transaction if the homeowner later decides to try for a loan modification. The length of time to process a short sale versus a loan modification is about the same. Some loan modifications take 3 to 6 months to conclude. It is unfair to a buyer who has submitted a good faith offer on a short sale and agreed to wait for short sale approval to discover that the sellers have had second thoughts and now want to do a loan modification in the middle of the short sale. Our advice is to make your decision and stick with it. Moreover, do not hire any company to do a loan modification for you because you can request it yourself without paying anybody. Many loan modification companies are scammers. Why Might a Short Sale Be Preferred Over a Loan Modification? Homeowners who would prefer to get out from underwater may prefer to do a short sale in-lieu-of a loan modification. A short sale means the bank will accept a reduced payoff and release the loan. If your home is worth dramatically less than the amount owed, it might make more sense to do a short sale and be relieved of the burdened debt. Here are other factors to consider: After 3 years of maintaining credit, if prices remain stable, homeowners may qualify to buy another home after a short sale with a mortgage and a payment that is affordable. Both a loan modification and a short sale may affect credit. But either solution is generally better than a foreclosure. Many loan modifications call for an adjustable-rate payment that could increase every year after the initial 5 years of fixed-rate payments have passed. Most of the short sale listings the author sells in Sacramento involve sellers who were denied a loan modification. At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Office of the Comptroller of the Currency. “OCC Mortgage Metrics Report,” Download PDF. Page 2. Office of the Comptroller of the Currency. “OCC Mortgage Metrics Report,” Download PDF. Pages 4-10.