How do you choose between loan modification, loan forbearance, a short sale, and bankruptcy when trying to prevent foreclosure?

The following is a quick comparison between these options and how they may affect your credit score, an issue many homeowners are concerned with.

Loan Modification

• Changes the terms of your loan to make future payments affordable for you
• Is different from refinancing and does not severely lower your credit score because you are not applying for a new loan, just changing your existing one
• Allows you to remain in your home and prevent foreclosure

Loan Forbearance

• Allows you to reduce or delay payments for a short time, with the understanding that another option will be used afterward to bring your account current
• Lender may combine forbearance with reinstatement or a repayment plan if you can make your payments by a specific date (works well for a sudden living expense increase or income loss)
• Temporarily ceases legal action from lender and gives you time to gather assets, readjust spending and recover financially
• Will not harm your credit score, but cannot be used as a long-term solution

Short Sale

• Home is sold for less than the outstanding balance of the mortgage, owner will move but will not be pursued for the deficiency (balance still owed after the house is sold)
• Less damaging to credit score than bankruptcy or foreclosure (minimal drop depending on the amount of debt>

Bankruptcy

• Keeps your home from foreclosure
• If you are not eligible for modification, you can get caught up with mortgage payments through your bankruptcy plan
• In many cases, you may already have a very low credit score due to debt and other factors, so filing for bankruptcy may not reduce your score much farther and could actually help you
• Provides a clean slate for you to immediately begin rebuilding your credit
• Credit card and other debt is discharged

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