Comparing the Costs of Foreclosure and Loan Modification

Foreclosure can be detrimental to a family, because not only does it strip them of a home, but it blemishes the borrower’s credit for many years as well. With a foreclosure on a credit report, borrowers cannot attempt to buy another home for at least three years, if not longer. Loan modification however, rearranges the terms of a mortgage to help a homeowner become current with the loan and reduce the monthly payment to something more affordable for the borrower. Instead of letting the mortgage get out of control, consider comparing the costs of a foreclosure against a loan modification to make the best decision. 

How Much Does a Foreclosure Cost?

The homeowners will pay an estimated $7,000 in fees when their home is foreclosed on. When considering the additional cost to the lender, the local government, and the neighboring home values, the total cost of a foreclosure is an estimated $151,000. This cost could pay for a home in some areas. Where it couldn’t pay for a home completely, it could put a serious dent in the mortgage.

It is also important to note that a borrower is responsible for capital gains, if the property values have increased. Therefore the cost of a foreclosure for a borrower can be even higher.

How Much Does a Loan Modification Cost?

A loan modification typically costs no more than $4,000. With governmental programs in place to help foster an economic recovery, these loan modifications are easier to get than ever before, and may not cost a thing, depending on the situation. Bringing homeowners current will salvage credit and prevent foreclosure. The reduction of payment of just $150 per month will cover the cost of the modification in less than three years, and help save the homeowners money so they can handle their mortgage payment and keep current to continue avoiding the costly foreclosure mistake/

Which is the Better Option?

Staying in your home is better for your credit score, which is ultimately better for you. Staying in the home proves stability to the lenders you may need to run to for help later. It helps keep the family stable as well. Foreclosure puts a major blemish on your credit and makes it difficult to secure other housing arrangements for the family. It is better to get a loan modification rather than foreclosing in the majority of situations, for both the borrower and the lender. If you don’t intend on staying in the home, it is better to modify the loan and stay there until you can sell than it is to foreclose.

Most lenders will agree to a loan modification before they will foreclose on a home, for the simple fact that even though the loan modification will cost them money, the foreclosure may cost them more money and there will be a lack of revenue to cover the costs of the foreclosure. At least with a loan modification the bank gets to keep a borrower in the home and keeps money coming in on the loan. The modification keeps the asset valid and reduces the risk of loss. Since lenders typically stand to lose anywhere from $50,000 to $80,000 per foreclosure, modifications will at least lessen the loss on the investment.