Does a Loan Modification Stop a Foreclosure?

Since we’re negotiating a loan modification or short sale, does that mean the bank will stop their foreclosure action against us?


In most cases, a mortgage lender will continue the foreclosure action even though they are negotiating a loan modification or short sale with the borrower.  Just because someone is working on a loan modification or short sale does not mean that the bank halts the foreclosure proceeding.

The perspective of the lender is that if the loan modification or short sale fails, then they can quickly finalize the foreclosure.  We have also seen situations where the bank negotiator states that they will temporarily stop the foreclosure action, but the borrower receives notice of an impending foreclosure sale.  Those are frequently cases of the left hand not knowing what the right hand is doing at the bank.

In some loan modification and short sale programs, the lender agrees to stop the foreclosure action for the duration of the program.  For example, the foreclosure action is halted on FHA (Federal Housing Administration) loans that are granted a short sale pre-approval, known as an Approval to Participate (ATP).  If the house does not sell during the listing period, then the borrower may transfer ownership via a deed-in-lieu of foreclosure and they will not be liable for any deficiency amount.

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