Many homeowners facing foreclosure today find themselves not only dealing with the pain of losing their home but also the added irony of seeing it sell to someone else for a price they could have easily afforded, if they just had the ability to finance the purchase.
The Plan
What Mr. and Mrs. Homeowner needed back in 2011 was a different 5 year plan, like maybe one that actually got them somewhere. Had they done their homework they might have given more consideration to doing a short sale when they had the option. By doing a short sale the Homeowners would have avoided foreclosure and have been eligible for a government backed mortgage in just two years. The time in between would not have been wasted either. Rather than spending the $2,000 per month on what now looks like a lost cause, they would have been renting a similar home for about $1,200. This would have resulted in savings of $19,000 over the 24 month waiting period. Assuming the short sale took about the same time to process as the loan mod they would have used the 9 month period that they stayed in their home with no payments to get back on their feet financially. Also during the 24 month period while renting they would have brought their credit score back up to the 750 range which would qualify them for a mortgage rate of 5% or less. 
The Purchase
Armed with the $19,000 in savings and a shiny new loan pre-approval letter Mr. and Mrs. Homeowner decided to take advantage of the low prices and went shopping for a new home. Since foreclosed REO homes sell at an average discount of 40.53%*, their same house or one of identical value could realistically be purchased in 2013 for about $123,000. That’s $177,000 less than its original value and a whopping $197,000 less than they would have owed at this same time with the loan mod! The Homeowners decided to use this same strategy and bought a new home that had been foreclosed on that perfectly matched the value, style and features of the one they had owned before the short sale.
They used the $19,000 they had saved and after closing costs they were still able to put $15,000 down and finance only $108,000. The payment on their new home now totals less than $800. Matching the out of pocket expenses they would have been paying with the loan mod on the old house, the Homeowners decided to pay $2,000 a month and put the difference of $1,200 on the loan principle to accelerate the payoff. By following this plan faithfully for the three years that would have remained on the loan mod we are able to view side by side the results of the two alternative approaches.
The Shocking Conclusion
By the end of that same 5 year period Mr. and Mrs. Homeowner have now been in their new home for three years. They owe just $55,000 on a home that is worth $196,000! The equity of $141,000 when compared to the negative equity under the loan mod scenario represents a benefit at the end of the 5 years of over $264,000. If they continue to make payments at $2,000 each month to match what the loan mod would have been, their new home will be completely paid off in another 33 months. By the way, Mr. and Mrs. Homeowner love their new home, have grown very comfortable in their new neighborhood and were not overly surprised to find out that with financial freedom they can make wonderful memories almost anywhere.
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