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Loan Modification Failure

Loan modification is often the preferred method of foreclosure avoidance for borrowers struggling to make their monthly mortgage payments.  When a borrower is faced with loan modification failure, they often wonder what other options are available to them to avoid foreclosure.  The good news is that there are several ways to avoid foreclosure if loan modification doesn’t work, the bad news is that few borrowers will not be very excited about those options.

A short sale is the sale of a home for less than what is owed on a mortgage contract.  The sale will come short of fulfilling loan expectations, hence the name.  In order to conduct a short sale, the lender must agree to accept less than the home is worth before the transaction is made.  In some circumstances, the lender will pursue the borrower for the remaining debt to cover their original loan obligation, but in many cases, the lender will forgive the borrower’s debt and simply cut their losses.  Even if a lender forgives the borrower’s debt, the borrower should realize that some states will count their forgiven debt as earned income to be taxed.  Borrowers should do their research to determine exactly how a short sale will impact them in the future and should not attempt a short sale until they are certain of possible consequences.

A deed in lieu of foreclosure involves the transfer of the deed to the property in question, either to the lender or to a third party investor.  Under this type of arrangement, the new land owner will agree to accept a certain amount of “rent” per month that is less than the borrower’s current monthly payments and will also agree to allow the borrower to remain in the property for a pre-determined period of time.  Basically, this option turns a homeowner into a renter in their own home.  Borrowers should also approach this option with caution because nothing stops the investor or lender from pursuing an eviction of the former homeowner from the property.  While the eviction must be legal and have merit, the fact that the lender or investor could aggressively pursue it often causes many struggling homeowners to shy away from this option.

Borrowers reading this information may not think that the two options listed above are legitimate ways to avoid foreclosure because in both cases the borrower still has to leave their home.  While true that the borrower has to surrender ownership of their home, it is not true that this is exactly the same as foreclosure.  Foreclosure is more than the forfeiture of property, it is a mark (many would call it a stain) on a person’s credit score that can have dire consequences for borrowers wanting to move past their bad experience and start over again.  If a person attempts a short sale or deed in lieu of foreclosure, they may lose ownership of their home, but they also avoid the mark of foreclosure on their credit score.  This means that it will be much easier for the borrower to move on from the loss of their home than if a full foreclosure was permitted.