In very simple terms:

In a short sale, the house is sold for less than is owed to the bank. The bank has to agree to the amount it is sold for. Then the homeowner no longer has the house.

A loan modification is when the bank agrees to modify the terms of the loan, lower the rate most likely, to make the home more affordable for the homeowner. The homeowner keeps the home and makes lower payments.

Unfortunately, it has been documented that most(many?), modifications do not work and the homeowner ends up defaulting anyway... and loses the home.

Couple questions...

Can you make your current monthly mortgage payments?

Do you owe more on your mortgage than the house would sell for right now?

Is your interest rate on your current mortgage high by today's standards (7%+)?

Do you have a steady job/income?

Do you want to sell your home?

Hi McBrown,

Pamghatten is *KINDA* right, but in a bit of a reverse fashion; Its not the 'loan modification' that doesn't work, its the borrowers that fail to keep the payment agreements the 2nd time. The 'loan modification' is just a resetting of terms, it doesn't *do* anything at all, so it can't succeed nor fail, it just sits there on paper.

Here's the lowdown;

Loan Mods let you remain and continue to own the home, but they are difficult and slow to get done, and there are many reasons for this; The rate of repeat borrower failure makes the banks resistent to even bother with them (they'd rather the home get sold so the relationship with the defaulting borrower simply goes away,) and modifying a loan frequently forfeits most (if not all) of the margin of profit that was originally part of the relationship that had the banking system incentivized to take the risk in the first place.

STILL... if you are a homeowner in a state of financial desperation, and you have no remaining savings to draw down, and you have lost your income sources to make your full payments, then it is definitely better to ATTEMPT to get a loan modification before you downgrade to the next option... as it gets worse for you as you drop further down.

In a shortsale you have to sell the home and leave. Your credit will reflect the shortsale, which would mean you won't qualify for government-sponsored mortgage financing for at least 3 years (unless the government changes the rules of the game, in which case all bets are off.) Unless the shortsale is properly negotiated, the amount of the loan that does not get repaid from the sale proceeds COULD become an unsecured judgment against you, which would mean you would have collectors and law firms chasing you potentially for decades (until you pay them, or declare bankruptcy... which again may or may not be a solution depending on how our government keeps or changes the rules of the game. NOTHING is off the table for "change" with the governments right now...)

Without knowing more about your particular questions & concerns, I'll pause here... else I could ramble about this ongoingly.

Luck!
Dave Donhoff
Leverage Planner