Foreclosure Loan vs Loan Modification

If you can’t keep up with your monthly mortgage, two of the most common options are foreclosure loan and a loan modification.

Although they produce similar results, there are some major differences between them.

What Is A Foreclosure Loan?

A foreclosure loan is a process where a company, group or person takes over your loan. If a person is in trouble with their mortgage, they are often approached by an entity offering help. Often times this entity will offer a foreclosure loan that works by making the mortgage current. In exchange, you pay the loan principle plus extra fees.

It is important to make sure you are dealing with a reputable company and avoid going through individual investors. A significant danger with this type of loan process is that if you sign away your home to an individual or company and you cannot qualify for a loan due to credit or payment, they will be entitled to your home. This is how many investors seek to acquire property at a low price. There are, however, honest companies out there that can help.

What Is A Loan Modification?

A loan modification is a process that deals with your mortgage and you without transferring any assets. It is one of the more permanent changes on your loan. In this case, loan modification offers a few choices.

•    Lower The Interest Rate: This works best for those that have Good to Excellent credit.

•    Reduce the Loan Balance: Some lenders will actually work with you to reduce the balance of the loan into a ratio you can afford. Keep in mind this will not be a significant deduction such as if you were 100k upside down in equity. Remember, the numbers have to make sense to the lender as well.

•    Postpone or Reduce Fees For Delinquency: In some cases the owner can catch up on payments but will not be able to pay the assessed penalties. With a loan modification, these penalties can either delayed or reduced.

•    Terms Alteration: One or more terms can be altered in order to make a home affordable.

How Do They Compare?

Both a loan modification and a foreclosure loan allow you to remain inside your home without filing for bankruptcy. The big difference is you have a high risk of losing your home with a foreclosure loan because you are paying many fees in addition to the cost of transferring out of the loan.

A foreclosure loan is also not seen as making a permanent fix whereas a loan modification works to address the issues that factors into the problem. Once a loan modification is complete, it gives the homeowner a fresh start.

In general, a loan modification and a foreclosure loan have its advantages and disadvantages. A loan modification is usually a borrower’s best option.  A foreclosure loan should be reserved for those homeowners who cannot qualify for a loan modification.