Short Sale vs. Loan Modification

For many home owners who have been stripped of equity, a short sale may be a better solution than a loan modification.

Example:

John and Suzy purchased their first home in Riverside, California on October 2007 for $460,000. With the economic downturn, their home is now appraised at $220,000.

October 2007
Purchase Price: $460,000
Loan Balance: $414,000
Interest Rate: 6%
Loan Term: 30 Years
Principle & Interest Payment: $2,482
Taxes and Insurance: $500
Total Monthly Payments: $2,982
Current Property Value: $220,000

Equity: -$194,000 (Negative)

Sample Loan Modification Outcome:

Original Loan Balance: $414,000
Delinquent amount added to loan balance by lender: $25,000
New Loan Balance: $439,000
Interest rate (reduced): 4%
Loan Term (increased): 40 Years
Principle & Interest Payment: $1,834
Taxes and Insurance: $300
Total Monthly Payments: $2,134
Current Property Value: $220,000

Equity: -$219,000 (Negative)

Although John and Suzy’s monthly payment was reduced from $2,982 to $2,134, their loan term was increased from 30 years to 40 years. Also note that they are now $219,000 upside down on their mortgage (loan balance of $439,000 minus current property value of $220,000).

With their economic hardship, John and Suzy were unable to continue the loan modification payments and terms and chose to short sale their property with California Home Assistance. California Home Assistance found a rental property in the same community for a lease payment of $1,800 a month, which they will rent for 2 years. 

Short Sale Outcome:

Because John and Suzy short sold their property, they will be eligible, under Fannie Mae guidelines, to buy another home in two years instead of five to seven years if they had foreclosed on the property.

California Home Assistance will assist John and Suzy in repairing their credit and finding them a home to purchase in 2 years. 

After two years, considering the average appreciation rate of 5% annually on the property, John and Suzy’s new home may look like this:

Similar home in Riverside, CA
Current Value $220,000
Appreciated value after 2 years $242,000
Purchase Price: $242,000
Loan Balance: $218,000
Interest Rate: 6%
Loan Term 30 Years
Principle & Interest Payment $1,040
Taxes and Insurance $300
Total Monthly Payments $1,340

Equity: $24,000 (Positive)

By contacting California Home Assistance, John and Suzy will be able to own a similar home after two years and have their payment reduced from $2,982 to $1,340. They have also erased the negative equity of $219,000 and have positive equity of $24,000.

Get your free home evaluation today!

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