Understanding Lenders Policies on Foreclosures and Short Sales
- The Bonez
A lot of homeowners are reporting that lenders are unwilling to allow short sales, even in some cases when the borrower is behind as much as ten months on payments. In fact, if there is apparently any chance of the borrower catching up, lenders seem to prefer the foreclosure route to cutting a strapped owner some slack. Even when there is a potential buyer lined up, lenders appear to be reserving the short sale option for only the most desperate of cases. Lenders do, however seem to be opening up to the idea of modifications, even if the owner is able to maintain current payments, in cases where the borrower is underwater on the mortgage, meaning they owe more on the loan than the home is worth.
A large part of the reason for this is that many homeowners, when confronted with stubborn lenders, have chosen to just walk away and take the massive credit hit rather than continuing to sink money into a bad loan. The modifications being offered vary, from a reduction in the interest rate to an extension of the term of the loan. A common practice is to add the total of missed payments to the principal and then extend the term accordingly. Another common practice is to forgive missed interest payments to give the borrower a fresh start. Extending the term of a loan can be an attractive option for strapped homeowners, since a 35- or 40-year term, even with a higher balance, means lower payments than a lower balance applied to a 30-year mortgage.
As far as lenders' unwillingness to approve short sales, there are several key reasons. First they do not want a potential buyer to be able to come in and, because they get the property at such a low price, turn the house around for substantial profit while the lender breaks even or even loses money. Also, lenders are adamant about preventing collusion, like when the borrower is approved to complete a short sale, then a relative comes in and buys the house at a deeply discounted price, bailing out the original owner and getting a great deal on the house while the lender sees his profit disappear. In the end, a lender will do what makes the most sense for their bottom line. If they can make more money foreclosing and selling the property than allowing a short sale, then that is what they will do.
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