My bank denied me a loan modification, is foreclosure or short sale a better option?
If you have been denied a loan modification you are not alone. Many Santa Clarita homeowners struggle with the difficulties. Meeting the guidelines of the investor can be difficult. The investor owns your loan and it is not always the same bank that services the loan (for example you may have a mortgage with Bank of America, or Wells Fargo as your servicer, but they may not be the actual investor, thus the investor is the body that determines the guidelines you have to meet for your loan modification).The most common reasons that a loan modification has been denied are a few of the following.
- 1) Calculating your income and your newly modified monthly payment to an acceptable ratio per each investor guidelines.
- 2) Not verifying income correctly or completely. Providing up to date pay stubs proving you have a place of employment to modify your loan. .
- 3) Missing information either because documents were not uploaded completely by the loan servicer or because the homeowner did not send a complete package.
- 4) There were missing signatures on the financial worksheet, tax returns, hardship letter or affidavit, or the 4506T tax form.
Loan modification has not been approved, what options are left?
If you have exhausted all resources with the bank and you do not approves for HAMP (making home affordable), HARP 2.0, or your particular servicer’s in house program there are still some options.
Choosing to do a short sale is one of the best options that is left. Like the loan modification it is your other alternative to prevent foreclosure. In many cases banks are willing to pay the homeowner up to $30,000 at the close of escrow to complete a short sale. The short sale option will also allow you to control your timelines more than a foreclosure. With a foreclosure you just wait to see what happens vs. a short sale you know what will happen throughout the process. Short sales can damage your credit, but certainly not as bad as a foreclosure and sometimes even less than getting a loan modification. This is dependent on how many payments you have missed and whether or not your bank has begun the foreclosure process.
Jason Renno, Senior Loan Officer of Pacfic Funding Mortgage Division explains this rather concisely:
The problem we are seeing with clients who have tried or done a loan mod is that they become late and damage their credit severely. Also, after they become several months late the bank files for foreclosure before the loan modification is complete. Although they rescind the foreclosure this still shows up on their credit report, which means when we run our automated underwriting system Fannie/Freddie picks this up and treats it like a foreclosure and therefore the foreclosure waiting periods take effect. Even though they never were foreclosed on.
A deed in lieu of foreclosure is where the homeowner request that the bank/investor accepts the home back and relieve the homeowner of the debt. Just like the loan modification and short sale process there is a document collection process. This process will be better for your credit than foreclosing. Most banks will require the homeowner to go through the loan modification process, and short sale process before considering a Deed in lieu of foreclosure.
Foreclosure can be the immediate reaction after being denied for your loan modification. Taking a step back to review your options before it gets too late can make all the difference. With a foreclosure this does become public knowledge. Names are posted in the newspaper, websites and other public areas. Many homeowners wish to be private about their financial position. Foreclosure process can take a few months which extends the amount of delinquencies reported to the credit companies and can make it harder to recover on your credit prolonging the possibility of future homeownership.
So, what is the best option, short sale, deed in lieu, or foreclosure?
To sum this up, a short sale could affect your credit less adversely than getting a loan modification depending on if you have missed any mortgage payments, how many, and if the service has begun the foreclosure process.
With the amount of banks that are paying homeowners to complete a short sale, after you have been denied a loan modification, this could be the best financial decision for you.
Of course we always recommend speaking with a professional CPA or tax attorney to determine exactly how it will affect you financially and what the best course of action is to take after your loan modification has been denied.
If you have any questions or would like a free short sale consultation or just some friendly advice please fill out the form below the video.
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