If you're a struggling homeowner trying to avoid foreclosure there are two options available to you - a loan modification or a short sale.

What is a Loan Modification - A loan modification is a written agreement that permanently changes the original terms of your promissory note to make your mortgage payments more affordable. To reduce the monthly payment amount, the modification typically lowers the interest rate and extends the length/term of your loan.

Who qualifies for a modification - Eligibility is based on guidelines that the Lender/Bank develops and not everyone will be approved. Though, if you meet the program guidelines and take all the necessary steps, you’ll get one.

Basic Eligibility Requirements to Get a Modification

No law details explicitly who qualifies for a loan modification, and who does not. But lenders tend to have similar guidelines and criteria when considering whether to modify a borrower's loan.

In general, most lenders look at:

• Your finances. As part of the review process, the servicer will evaluate your income, loan payment, and financial circumstances.
• Whether you have a valid economic hardship. Lender guidelines almost always require the borrower to have experienced a hardship that has made the current payment amount unaffordable. A valid financial hardship is an event that was generally unavoidable or outside of your control, like the death of a coborrower, job loss, or a divorce.
• Ability to pay. Lenders want to see that you have some source of regular income, although the amount of income might be less than what it was when you took out the loan. For example, a borrower who has resumed earning income after a period of unemployment might qualify for a modification that lowers the monthly payments.

Depending on the type of loan you have and your circumstances, you might qualify for a Fannie Mae or Freddie Mac modification, an FHA modification, or a proprietary (in house) modification.

Documents You’ll Need to Provide With Your Loan Modification Application

To get a modification, you’ll need to submit a complete application to your servicer/mortgage bank. As part of that application, you’ll need to provide specific documents. While the exact list of documents your servicer will require might differ from the list below, the following items are generally required as part of an application:

• an income and expenses financial worksheet
• tax returns (often, two years’ worth)
• recent pay stubs or a profit and loss statement
• proof of any other income (including alimony, child support, Social Security, disability, etc.)
• recent bank statements, and
• a hardship letter or affidavit.

If you do not qualify for a Loan Modification your next option is a Short Sale.

What is a Short Sale - A short sale is a home that is available at a purchase price that is less than the amount owed by the current homeowner. The short sale benefits the bank by allowing it to avoid repossessing the home in foreclosure, which is expensive and time-consuming. The seller avoids the credit hit that comes with foreclosure and the bankruptcy that sometimes accompanies it.

How a Short Sale Work - A short sale is a financial option that is sometimes available to homeowners who are distressed borrowers. They are behind on their mortgage payments and have a home that is underwater. That is, the home is worth less than the outstanding balance on the mortgage.

Short sales are usually initiated by the homeowner and before the process can begin, the lender who holds the mortgage must sign off on the decision. Additionally, the lender, typically a bank, needs documentation that explains why a short sale makes sense. After all, the lending institution could lose money in the process

If approved for short sale, the buyer negotiates with the homeowner first and then seeks approval on the purchase from the bank second. It is important to note that no short sale may occur without lender approval.

Short sales tend to be lengthy and paperwork-intensive transactions however, they do not impact as negatively a homeowner's credit rating as does a foreclosure.

A short sale looks better than a foreclosure to future lenders and creditors. It shows that the person acted before the bank moved to repossess the home. A homeowner who has gone through a short sale may even be eligible to purchase another home immediately.

If you need help with modifying your loan or doing a short sale give us a call at 516-300-2427. Our experts are ready to assist you.