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Should I Sell Short or Modify?

Short sales and home loan modifications are two very useful tools to fight foreclosure, but have two very different results. In most cases, home loan modifications will be the most beneficial option for borrowers and lenders. Home loan modifications reduce a borrower’s monthly payments while allowing them to stay in the home. In contrast, short sales require a homeowner to leave their home and may make them liable to their lender for the remainder of the original loan. If a lender forgives a certain amount of debt, some states will tax the forgiven amount as earned income. When viewed side by side, home loan modifications seem far more beneficial and far less expensive than short sales, but short sales do have their benefit.

Homeowners who never planned on living in their home for the entire length of their 30 year loan might consider a short sale so that they can move on to where they really want to live. If a lender forgives a portion of the loan in a state that does not tax forgiven debt, the homeowner could come out on top.

A short sale is a great alternative to bankruptcy if a loan modification request is denied. A bankruptcy has the potential to stay on a person’s credit report for up to 10 years, while a short sale doesn’t even appear as “short sale” on the report. When a short sale is listed on a person’s credit report, the information is often reported as “settled” or “settled less than owed”. In most cases, a person with a short sale reported on their credit report can be a strong candidate for a new home loan in as little as two years.

There are some homeowners who decide that homeownership is not for them. Many individuals who face foreclosure realize that owning a home is more responsibility than they really want at this stage of their life. Being a renter is simply easier than being an owner. Renters don’t pay any property taxes, they don’t have to mow any lawns, and if any repairs are needed, all they have to do is report the necessary repair to their manager, eliminating the need for hours of calling around for quotes and estimates. If a person decides that homeownership is not for them, modifying the terms of their loan would not be ideal because home loan modifications keep the borrower bound to a contract, while a short sale allows the borrower to sever most, if not all, commitments to a lender.

Deciding between home loan modifications and short sales is a personal choice that should be made with sound legal advice being considered. An experienced real estate attorney can explain the pros and cons of each option that a homeowner has. The attorney will evaluate the needs and desires of their clients before advising them on which option is best for them. A local expert in law would be best to explain the pros and cons of each option because the laws of each state can negatively or positively impact the decision of the homeowner.