By Dave Friedman, Realtor and Certified Foreclosure Specialist

With an estimated $7 trillion dollars lost in the real estate market since the “Big Recession”, many Americans want to look at loan modifications. There are limited situations where a loan modification makes sense and may turn out good for the homeowner, which may be construed as good such as when your home is slightly upside down compared to the debt and your interest rates are high. The bad loan modifications have no real principle reduction. The ugly can be a process of applying for a loan modification that drives the homeowner straight into foreclosure with time running out for a short sale.

The Good: If your home is slightly upside down, then it may make sense to obtain a loan modification with lower interest rates such as President Obama’s Home Affordability and Stability Plan. According to the new program that may roll out in the near future there needs to be at least 80% loan debt to value or higher. There have been other similar loan modification programs such as HAMP (home affordability modification program) that are at the option of the banks which has temporarily worked for about 8% of the distressed homeowners. Most of those modifications turn into short sales or foreclosures if the home owner is still struggling financially. If you are not making payments the banks are more motivated to create a loan modification. Many banks do want to see that you are now working with monthly expenses and income within a few hundred dollars of each other. Unemployed need not apply.

The Bad: Some lenders will work with reducing payments based on a lower loan principle which sounds exciting but isn’t. If a home owner has $200,000 of debt over the home value, some banks will make the payments based on a principle reduction of $200,000. When the time comes to sell your home the bank will require you to pay them back the original full principle which is the remaining principle plus the principle reduction of $200,000 out of escrow.

The Ugly: The worst case is a bank sucks the last amount of money from you under the temporary payment plan and then turns down your loan modification. A trial period is frequently required for your loan modification with the criteria listed above. The banks can then turn your permanent loan modification down forcing you into foreclosure with limited time permitted for a short sale if you can not make the loan current. The clock in many cases of when the home is to go to trust deed sale does not stop. It may get postponed by one or two months at a time. This is an abuse of the distressed homeowner when the recommendation should have been a short sale for everyone’s best interest.

Before deciding whether a loan modification is a good option, you need to see if your home is worth less than the loan. If your home is upside down by a large sum to your standards and you have endured a hardship of lower income or increased expenses, then you have two choices to cut off excess home loan debt. A foreclosure will wipe your debt clean when you return the house back to the lender which includes a large credit hit. A short sale is the best tool which will allow the debt to be wiped clean and allowing you back in the home purchasing market (in a few years) at a lower cost than a foreclosure on your credit report.

Many distressed home owners fall into the category of large debt above their home value. Some homeowners are waiting out of fear. There is a window closing by the end of 2012 which waves tax liabilities on the forgiven owner occupied debt. The short sale process is a great opportunity for families to start fresh with no house debt. Be very careful about whether a loan modification is the best solution since your family should not put themselves second to a bank. It is important to discuss your options with a certified short sale and foreclosure specialist such as myself.

Your property sale, purchase, investment or distressed loan resolution will be a comfortable and stress free experience from my over 20 years in the real estate business. You can call me with any Real Estate Questions at 818-Myhouse (694-6873). 818MyHouse.com with Keller Williams Realty – My Experience Turns Your Real Estate Dreams Into Reality.