Negotiating a Short Sale after Loan Modification

by Jcub
(Mountain House, California, USA)

Ask Kate about Negotiating a Short Sale after Loan Modification: Kate, will modifying our home loan through HAMP hinder our attempts at a real estate short sale?

Jcub continues... We have a 495K mortgage and our property is worth 280K in a 2100 sqft home. So it is really upside down, and by the way we are current on our payments.

The mortgage company has given us a HAMP (Home Affordable Modification Program) proposal that now includes our taxes and insurance in our monthly house payments. But they extended the loan from 30 to 40 years, along with increasing our principal to $500K.

We are going to short sale our home. But if we take the HAMP, we save a good amount of money each month while waiting for our home to sell.

Taking the HAMP while we wait, is that a good idea or bad idea?

Kate Answers: Negotiating a Short Sale after Loan Modification

Dear Jcub,

I've been away from my computer for a week and feel so emotional returning to the recent Ask Kate questions.

The majority of Readers I am hearing from are contemplating loan modification or short sale. To say times have changed is an understatement.

No matter how it's split, examining mortgage loan modifications and short sales isn't a bundle of fun. But as much as it feels like picking your poison, I'm sure you'd agree it's better than the alternative, foreclosure. So let's take a quick look at these two options.

Loan Modification

Loan modification can be a good deal for a homeowner. It offers a combination of lower interest rates, forbearance on a portion of the mortgage, and extended repayment periods with the intent of more affordable monthly house payments.

But HAMP and other types of loan modifications don't come without a price to a homeowner's credit history. Credit scores will definitely suffer. The future of borrowing on credit will be significantly more difficult for years to come.

Negotiating a Short Sale

A short sale is for homeowners who would like to sell their home but owe more on the mortgage than the value of the property. The lender sometimes will agree to accepting less than is owed and allow the sale of the house to finalize.

This option for beleaguered homeowners also lowers credit scores and affects future borrowing. Some believe short sale has less of an affect on credit histories than foreclosure, but I have never seen the facts to validate this claim.

Of course, I am not suggesting a homeowner should opt for mortgage foreclosure over short sale, rather that I am not convinced one is less harmful on credit than the other.

Difficulty of Negotiating Short Sales After Loan Modifications

When a homeowner qualifies for a short sale under the Making Home Affordable Foreclosure Alternatives Program, the lender accepts the payoff in full satisfaction of the mortgage.

But what if a homeowner precedes the short sale with a loan modification? Unfortunately, the manual is still being written. So because there are no definitive answers, here is what I would consider before jumping into HAMP.

1. Will agreeing to a mortgage modification through HAMP make a lender less willing to negotiate a short sale when it's time to sell your house?

2. Will you be more apt to getting your credit report tagged "paid off for less than owed"?

3. Will pushing the boundaries by following a HAMP loan with a short sale make further borrowing even more difficult?

Benefit From Making Home Affordable (MFA) Events

Although I can't answer these questions without speculation, I can tell you what I would do next. I'd proceed to the website of the servicer collecting my mortgage payment.

I'd search their website for an announcement of a community outreach meeting scheduled nearby. Making Home Affordable (MFA) Events are being held all over the nation. Sometimes larger banks sponsor their own and invite HUD counselors to go over budgets and help with qualifying for HAMP. Other times, they are joint events.

For instance, 37,000 homeowners attended a joint-lender meeting recently in Los Angeles. Loan modifications were issued on the spot. Questions regarding how to avoid foreclosure and preserve homeownership were answered.

Because nothing equals sitting down face-to-face with HUD, bank officials and other loan counselors, I'd do whatever it takes to sign up for and attend one of these meetings.

Is Mortgage Loan Modification Easy?

For further help with mortgage loan modification, go to my report at Is Mortgage Loan Modification Easy?.

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Best wishes,

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