Can I Short Sell My House After a Loan Modification?
Yes, you may be able to short sell your house after a loan modification.
In fact, some homeowners begin considering a short sale precisely because a previous loan modification no longer solved the problem.
Maybe the modified payment became unaffordable. Maybe your income changed again. Perhaps taxes, insurance and other expenses increased. Or maybe you recently discovered that between your mortgage, deferred balances and other liens, you owe more against the property than you expected.
Whatever happened, receiving a loan modification does not automatically mean that a short sale is off the table.
The bigger questions are:
What is your home worth today?
How much actually needs to be paid when you sell?
And does your mortgage servicer consider you eligible for a short sale?
Those are the numbers and questions we need to work through.
Why Would I Need a Short Sale After a Loan Modification?
When you received your loan modification, the goal was probably to make the mortgage affordable enough for you to keep the home.
Sometimes that works permanently.
Sometimes circumstances change.
You might experience another loss of income, increased household expenses, a higher mortgage payment or simply reach the conclusion that the home is no longer affordable.
There is another possibility that homeowners sometimes don't discover until they consider selling:
Your loan modification or related mortgage assistance may have changed the financial picture of the property.
For example, you may have deferred principal or a partial claim that isn't obvious when you simply look at the balance on your monthly mortgage statement.
When everything that must be paid is added together, you may discover that there isn't enough equity for a traditional sale.
That's when we may need to investigate a short sale.
Does a Previous Loan Modification Prevent a Short Sale?
Not necessarily.
A previous loan modification and a short sale are two different types of mortgage-loss-mitigation solutions.
The modification was intended to help you keep the property.
A short sale may be considered when selling the property becomes the more realistic solution and the expected proceeds aren't enough to satisfy the mortgage under its normal terms.
Your mortgage servicer will determine whether you qualify under the requirements that apply to your loan.
Your previous modification will be part of that history, but it does not automatically mean the lender will refuse to consider a short sale.
What If My Loan Modification Failed?
Maybe you successfully completed the modification but later fell behind again.
That happens.
The important question now isn't whether the previous modification was a success or failure.
It's whether the mortgage is sustainable today.
If you cannot realistically make the modified payment going forward, you need to evaluate your current choices.
Depending on your situation, those might include another available loss-mitigation option, selling traditionally if you have sufficient equity, or exploring a short sale if you don't.
What I don't want homeowners doing is repeatedly draining savings or using credit just to postpone looking at the underlying problem.
Do I Have to Be Behind on My Mortgage to Short Sell?
Don't intentionally stop making mortgage payments because you assume that's required.
Short-sale eligibility varies according to the mortgage, investor, servicer and homeowner's circumstances.
Some programs evaluate delinquency and hardship differently from others.
If you're current but know that your financial situation is changing, start gathering information before deciding what to do with your payments.
Contact your mortgage servicer to understand the options available for your particular loan.
From the real estate side, we can begin determining whether you actually need a short sale in the first place.
First Find Out Whether You Really Are Underwater
This is important.
Don't assume you need a short sale simply because you previously had a loan modification.
And don't assume you have equity because an online home-value estimate is higher than the principal balance shown on your mortgage statement.
We need to look at the whole picture.
That can include:
- realistic current market value,
- first mortgage payoff,
- deferred principal,
- partial claims,
- second mortgages or other liens,
- property-related obligations, and
- expected costs associated with selling.
You may discover that you have enough equity for a traditional sale.
Great.
You may discover that the numbers are close.
Or you may discover that there is a genuine shortage and lender approval will be necessary.
Until we know the numbers, we're guessing.
What Is Deferred Principal?
Some loan modifications involve moving a portion of what you owe into a deferred balance.
You may not be making regular monthly payments on that portion of the debt, but that does not necessarily mean the balance disappeared.
Depending on the terms of your particular modification, deferred amounts may become relevant when the property is sold or the mortgage is otherwise paid off.
That's why I don't want to calculate your equity from the monthly statement alone.
We need to understand what will actually be required at closing.
What About a Partial Claim?
Some homeowners received mortgage assistance involving a partial claim or another subordinate obligation.
That can become extremely important when you decide to sell.
You may have been making payments based primarily on the first mortgage while another amount remains secured against the property.
If that additional obligation causes the total amount owed to exceed the available sale proceeds, it may affect whether the transaction can close as a traditional sale.
This is something I would much rather discover before we list the property than after you're already in escrow with a buyer.
How Does a Short Sale Work After a Loan Modification?
If we determine that the property probably cannot sell for enough to satisfy the required obligations, the next step is to determine whether a short sale should be pursued.
The property is marketed for sale, but the transaction is contingent upon obtaining the necessary short-sale approval.
The mortgage servicer will generally require information about the proposed transaction and may require financial or hardship documentation depending on the applicable program and circumstances.
The lender or servicer will also evaluate the proposed sales price and other terms.
A short sale is not simply:
“I owe $500,000, so I'll sell the house for $400,000 and the lender gets what it gets.”
The lender has a say in the transaction because you are asking it to approve less than the amount otherwise required to satisfy the mortgage.
Will the Lender Approve My Short Sale Because I Already Had a Loan Modification?
A previous loan modification does not guarantee short-sale approval.
Your current circumstances still matter.
The mortgage servicer may evaluate factors such as the loan status, applicable investor guidelines, hardship, property value, proposed offer and required documentation.
Every file has to stand on its own.
But having previously modified the loan doesn't mean you should assume a short sale is unavailable.
Can I Short Sell Before Foreclosure?
Potentially, yes.
You don't have to wait until the property is days away from a foreclosure sale before investigating a short sale.
And from a practical standpoint, earlier is better.
A short sale can involve gathering documents, marketing the property, obtaining an offer, submitting the transaction for approval and working through lender requirements.
That takes time.
If foreclosure activity has already begun, the applicable dates become extremely important.
Read every notice you receive from your mortgage servicer and seek appropriate legal advice regarding foreclosure rights and deadlines when needed.
From the real estate side, our goal is to avoid discovering at the last minute that we had a viable selling option but didn't leave enough time to pursue it.
What If I Have More Than One Loan or Lien?
That doesn't necessarily prevent a short sale, but it can make the transaction more complicated.
Other lienholders may need to participate in or approve aspects of the transaction.
That's another reason title and payoff information matter.
I want to know what is attached to the property before we get too far into the process.
A homeowner may remember the first mortgage perfectly while forgetting about an old second mortgage, partial claim or other recorded obligation.
Those surprises are much easier to handle when we find them early.
Should I Try Another Loan Modification Instead?
If you want to remain in the home and another affordable mortgage solution is available, it may be worth exploring.
But ask yourself one important question:
If another modification is approved, can I realistically afford the home long term?
If the answer is yes, keeping the property may still make sense.
If the answer is no, repeatedly modifying or restructuring the mortgage may simply postpone the same decision.
At some point, the question changes from:
“How do I keep this house?”
to:
“What financial decision makes the most sense from here?”
A Previous Loan Modification Doesn't Mean You Failed
Homeowners sometimes view a short sale after a loan modification as if the modification somehow failed—or they failed.
That's not particularly useful.
The loan modification addressed the circumstances you had at that time.
Your circumstances today may be different.
If the property is still affordable and you want to keep it, explore your available options.
If it isn't affordable and there is enough equity, selling traditionally may be the answer.
And if selling makes sense but there isn't enough equity to satisfy the obligations against the property, a short sale may be worth investigating.
Start With the Property Value and What You Actually Owe
If you're considering a short sale after a loan modification, you don't need to know exactly which program applies before calling me.
Let's start with the real estate.
What is the property realistically worth?
What do you owe?
Are there deferred balances, partial claims or other liens?
Would a traditional sale work?
If it would, wonderful. You may not need a short sale at all.
If it won't, then we can look more closely at the mortgage and determine whether pursuing short-sale approval makes sense.
At Midas Realty Group, I have worked with Southern California homeowners through complicated short sales and mortgage situations for many years.
A previous loan modification doesn't automatically close the door on selling.
Sometimes it simply means we need to look more carefully at everything behind that door before deciding what comes next.
This information is for general educational purposes and is not legal, tax or financial advice. Foreclosure and loss-mitigation situations can involve important deadlines and individual circumstances. Consider consulting an appropriate attorney, HUD-approved housing counselor, tax professional or other qualified adviser when needed.
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