There is a lot of buzz these days around the words "Short Sale" and "Loan Modification" and you most likely have heard one or both of them on the news recently. Although they are used simultaneously and there are Realtors that say they specialize in both, it is important to know they are entirely different. The major difference is that Loan Modifications are designed to keep you in your home and Short Sales are meant to protect your credit and allow you to buy a home again much sooner than if your house needs to be foreclosed on.

Short Sales: The Basics

The basics of a Short Sale is where your house is sold for less than what you owe on it. The lender agrees to take less because they do not want to have the liability on their books. It is a sale and you have to leave your house, however, you will be able to buy again within 2 years and your credit is protected from a foreclosure. This could be a difference of up to 200 points for your credit score.

Short Sale Pros:

• 1. If your property is upside down, then you get rid of the liability now. If you do a loan modification and then have to sell your house in 2 years, you may still be upside down the same amount or worse. Will the values come back, will they decline further?
• 2. Within 2 years, your credit rating may recover and you will not have to harm your credit to do a short sale in the future. You may be better positioned for the times ahead.

Short Sale Cons:

• 1. You will have to sell your home and move eventually.
• 2. You may not be able to buy a house for two years.

Loan Modifications: The Basics

The basics of a Loan Modification are interest reduction, and longer terms. Banks and loan servicers have a special department to negotiate them. If you have your job and there are not been any major change in your life that would cause you to not be able to make agreed upon lower payments, you may qualify for a loan modification.

Loan Modification Pros:

• 1. Some of the large lenders seem to prefer loan modifications over short sales.
• 2. The lenders seem to be able to turn loan modifications around faster.
• 3. As long as you continue to pay, you can stay in your home.

Loan Modification Cons:

• 1. Without leverage it is unlikely you will negotiate a principal reduction.
• 2. In a typical loan modification you may just be buying time. You get to make payments until you decide to sell or your payments go back up.
• 3. If you are not careful, you may lose or waive important anti-deficiency protections

Beware of loan modification companies! They charge a fee for their service and the results in many of these cases is exactly the same if you were to call the lender yourself. A loan modification may only make sense if your lender is willing to write down the principal balance of your loan. On the other hand, with a short sale, you are able to sell your home that has an upside down loan balance, rent for 2 years, and then come back to the Real Estate Market to purchase a new home again.