Lenders are offering loan modifications in a number of ways — lowering the interest rate, extending the term, or maybe both. Some will add up all the missed payments and tack that amount back on to the principal of an extended loan. Others will waive all those missed interest payments. Even at a higher balance, the payments for a 35- or 40-year mortgage are often less than a lower amount amortized over 30 years. However, always look at the month-to-month payments: it makes no sense to require someone to make a payment that’s larger than the amount he or she can’t afford in the first place.
When addressing a short sale, lenders are slow to approve short sales for several reasons. One, they want to make sure that the sales price is not so far below the market for the area in question that the new buyer can’t turn right around and sell the place at a big profit. If that’s the case, lenders want the money to go into their pockets, not those of some flip artist (be weary of this tactic if you are a short sale investor). The banks also want to make sure the short sale is an arm’s length transaction as opposed to one in which the buyer is, for instance, a homeowner’s brother-in-law who could wind up getting a sweet deal at the bank’s expense.
At the end of the day, the lender’s decision is based on cold, hard mathematics. If it can make more by foreclosing on the borrower and putting the house back on the market than it can by allowing a short sale and getting back only a portion of what it originally lent, the choice is an easy one, at least for the lender. And just because an appraisal shows properties in that area only sell for, 200k lets say, doesn’t mean the bank will settle at that amount on a 350k loan. Whether it is foolishness or greed, many will, whether in a short sale or at foreclosure auction, tack on more to the appraised value in order to save their losses (even on a bad loan). This results in many bank-owned REO properties.
