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A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan and is a strategy rapidly gaining popularity in the real estate market. It is a real estate sales transaction in which the seller’s mortgage lender agrees a payoff that is less than the balance due on the loan and in which the borrower does not have to pay the difference. This agreement takes place between the seller and their lender, prior to the onset of foreclosure, allowing the home to be sold for less than the current outstanding loan balance. When a homeowner owes more on their home than it is worth, a short sale may be an option. The goal of a short sale is to help the homeowner avoid foreclosure and when both the borrower and the lender agree to the short sale process, it generally enables the avoidance of foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. Keep in mind that, unlike bankruptcy line items, short sales do show on a credit report and can remain on your credit report for 7-10 years.

A real estate investor engaging for the first time in foreclosures and short sales will need to know exactly what a short sale is and clearly understand the process involved in a short sale. A key component for a buyer to be successful when purchasing a short sale is to make sure that they do research on the market conditions and area of the home. Although aquisition through a short sale can be a successful strategy in purchasing distressed real estate, due to the real estate market’s foreseeable inconsistencies a buyer can purchase a home and still experience additional reduction in value. Keep in mind that while Lenders want to get rid of distressed properties as soon as possible, they typically aren’t going to sell them for ridiculously low prices. It is also important to remember that it is very possible that a short sale can and will fall through if the Broker Price Opinions come in much higher than the agreed upon price.

A real estate short sale is a strategy that can help homeowners who owe more for their house than the houses are worth, and is another option of relief for troubled homeowners. Before proceeding with a short sale it is imperative to evaluate your personal situation and determine if a real estate short sale is right for you. A short sale is typically faster and less expensive than a foreclosure, but there are downsides that merit consideration as well. Sellers should be careful to consult with their lenders and tax advisers as to the impact of a short sale and clearly understand the impact of the potential outcomes. If all other options have been exhausted and a short sale is the best choice, it is highly recommended that the seller work with a licensed real estate agent who can assist in listing the home for sale. Sellers should also keep in mind that Buyers can get tired of waiting for short sale approval and cancel because banks can’t process their short sales fast enough. Buyers need to understand the current market conditions and values and work with a Realtor they trust. However, when utilized in the appropriate situations a short sale can be beneficial to all parties involved.

Loan Modification consultants have being saying it for a long time; the best loan modifications are those that reduce the balance of the loan. This might seem obvious; of course borrowers are going to prefer loan modifications that reduce the amount they owe. What is not so obvious is that these types of loan modifications may be the best kind for lenders too.

Loan Modifications can use a variety of tools and measures to reduce the monthly payments of a mortgage. Reducing monthly payments is considered to be the main objective of a loan modification, as a way of giving troubled borrowers a break so they can continue to pay their mortgage. This can be done by:

1)      Reducing the interest rate of the mortgage, either temporarily or permanently.

2)      Extending the term of the loan, which means giving the borrower longer to pay the loan back.

3)      Rolling interest payments to the end of the loan, this reduces monthly payments but creates a huge payment at the end of the loan.

4)      Principal reductions of the loan balance. Here the bank or lender “forgives” or writes off a portion of the loan.

The Obama Administration does not control which measures lenders use on loan modifications and they certainly don’t require lenders to cut mortgage principals, what’s more, until recently principal reductions seemed unthinkable, a nice idea but not very practical. It must be said that forgiving debts is a nice thing for friends to do, but it doesn’t sound like a good way for lenders to do business.

However, recent reports are showing that principal reductions could be a key factor in creating cost efficient loan modifications for both lenders and borrowers. One of these reports was published by the Lender Processing Services June 2009 Mortgage Monitor and concluded that re-defaults on loan modifications with a principal reduction element fare much better than those based exclusively on interest rate reductions. The report states that “the success rate for loss mitigation-related loan modification hovers in the 30-40% range, with a higher success rate for loan modifications involving a reduction in unpaid balance.

The success rates of loan modifications with principal reductions is so much better than with other methods that lenders are beginning to listen to the data and increasing their principal reductions on mortgages of troubled borrowers.

You might still ask yourself why banks or lenders would be willing to cut unpaid loan balances instead of using other apparently cheaper measures. The key, we hinted at above, are foreclosures. Foreclosures are expensive for lenders, selling in a buyers’ market and the costs associated with selling a property are not cheap.  Having said that any kind of loan modification carried out to avoid foreclosure is expensive for lenders whether they reduce interest rates, extend the term of the loan or reduce the principal balance, what makes it even worse is when borrowers re-default on their loans after the loan modification. Because foreclosure re-defaults are much lower on loan modifications with principal reductions, lenders are starting to think they might be cheaper in the long run, which is good news for the fortunate few that actually qualify for a loan modification.

Related posts:

1. Foreclosure Re-default Drops by 26.5 When Loan Modifications Reduce Loan Balance
2. Loan Modifications Only Hope For American Dream
3. Is Bank of America headed towards principal reductions?

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1. Foreclosure Re-default Drops by 26.5 When Loan Modifications Reduce Loan Balance
2. Loan Modifications Only Hope For American Dream
3. Is Bank of America headed towards principal reductions?

Do loan modifications affect your credit score? Should they? Why should you care?

Credit scores are a numerical value credit bureaus place on a borrower as a way of measuring their reliability. It is in the interest of lenders to report any delinquent activity to the credit bureau. In fact some would argue that it is in the interest of everyone as delinquent borrowers make loans more expensive for everyone by forcing lenders to increase interest rates to pay for bad loans. This is why potential borrowers that have bad or low credit scores find it harder to get loans approved or have to pay a premium for the privilege.

Borrowers that don’t make one or various payments are marked by a special code that informs other lenders of the situation. Borrowers that are granted a reduction of their loan balance or monthly payments due to financial difficulties are also marked with a special code called AC. This code can reduce the credit score of a borrower by anything between 30 and 100 points and tells lenders that the borrower had only made a partial payment.

The problem arose when troubled borrowers entered the loan modifications sponsored by the government and were granted loan modifications without ever having missed a payment but were still marked with AC as it was the closest fit in the “system”.

The Obama Administration felt it was unfair to harm the credit scores of borrowers that sought a loan modification. Therefore a new code “CN” was thought up which will not have an impact on credit scores for now.

The question is if this will change. Will the code CN affect the credit score of borrowers in the future? This is still to be determined. It will depend on if FICO, the company behind the most popular credit score formulas, decides the appearance of CN in a credit report increases the chances or is predictive of delinquent behavior.

It is worth noting that borrowers that enter into a loan modification are asking for a reduction of their loan and are therefore not wonderful news for lenders that are looking for reliable customers. It is not at all clear to me why it is wrong that their credit score is somewhat affected.

However what is certain, and this is what worries the Administration is that borrowers with a good credit history will shy away from a loan modification that threatens their credit.  Lenders might argue that borrowers who feel they have a choice and prefer not to enter into a loan modification that would damage their credit don’t really need it and can very well pay the full loan, thank you very much.

How you feel about the matter may very well depend on which side of the fence you are looking from. The Obama Administration wants to give HAMP the best chance possible and is eager to erase any bad publicity the program attracts even if this means fudging credit reporting codes. Whether these measures are long lasting or not will depend on the performance of borrowers that enter into a loan modification, it must be said at this stage that things don’t look all that good.

Related posts:

1. Wachovia Loan Modifications Help Only 3% and May Damage Your Credit Rating
2. Are Credit Scores Obsolete?
3. Loan Modifications and Mortgage Modifications Can They Affect Your Credit Score

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1. Wachovia Loan Modifications Help Only 3% and May Damage Your Credit Rating
2. Are Credit Scores Obsolete?
3. Loan Modifications and Mortgage Modifications Can They Affect Your Credit Score

The problem with loan modifications is re-defaulting. Well, that is only one of many problems with loan modifications but it is certainly one of the most annoying ones for lenders and the Obama administration. This is because loan modifications cost money. They cost money, they take time and this is a complete waste if the borrower re-defaults shortly after completing a loan modification.

That is why the government is interested in finding out what kind of loan modifications are less likely to re-default. The Federal Reserve Bank of New York carried out a new study that analyzed the success rate and re-default rates of different loan modifications.

The study reveals that when loan modifications reduce the principal, or write down loan balances re-default rates drop by half.

Loan modifications come in a variety of shapes and flavors. The main purpose of loan modifications is to reduce the monthly payments so that borrowers can afford them. Not surprisingly the most successful loan modifications are those that reduce loan modifications by the most. However there is more than one way to skin a cat and the same goes for loan modifications. Monthly payments can be reduced by reducing the interest rate, lengthening the term or rolling the interest to the end of the loan and of course the bank can write off part of the loan.

The above mentioned report showed that how the monthly payments were reduced affected re-defaulting rates. For example the findings showed that when a modification reduced the borrower’s interest rate by 2.8 percent and reduced monthly payments by 25% probability of re-default is reduced by 11%.

However when loan modifications reduced monthly payments by the same 25% by reducing the loan balance and through a slight interest rate reduction re-defaults drop by 26.5%.

This could have important implications for the government in its efforts to help troubled borrowers from losing their homes. The government is willing to invest money in incentives and programs to support loan modifications if this report is correct the money might be best spent for all involved reducing loan balances than lining lenders’ pockets.

Why does reducing loan balances reduce re-default rates?

The answer seems to be that many borrowers re-default on their loan modifications because their homes are so underwater there is little incentive in throwing good money after bad towards a mortgage that is worth more than the house it is paying.

However when lenders reduce the balance of a loan this increases the prospect that house price appreciation might bring the borrower out from underwater and back into positive equity. This provides extra incentive to the borrower that sees financial benefits in continuing to pay the mortgage despite it being underwater. If this study proves to be true it might be profitable for lenders to write off portions of a loan as part of a loan modification while maintaining interest rates or only reducing them slightly.

Both reducing interest rates and reducing the loan principal costs lenders money the important question is which option is most cost effective in the long run.

Related posts:

1. Loan Modifications With Principal Cuts Attract Lenders Attention
2. Loan Modifications, A Loose, Lose Story With No Winners
3. Loan Modifications, Hope, Lies and Misinformation

Related posts:

1. Loan Modifications With Principal Cuts Attract Lenders Attention
2. Loan Modifications, A Loose, Lose Story With No Winners
3. Loan Modifications, Hope, Lies and Misinformation

An increasingly  popular alternative to foreclosure is the loan modification, an agreement where the bank and borrowers reduce the cost of the loan for a period of time to allow payments to be made on time.  A loan modification is much like a mortgage refinance in that the objective is to find you a more affordable mortgage payment for your financial situation.  Refinancing your existing mortgage to obtain a more affordable mortgage payment could still be an option.  However loan modification is often the best solution for the homeowner that has incurred a financial hardship that prevents other mortgage financing or payment options. The purpose of a loan modification is to help make the loan more affordable to the borrower.

A Loan Modification is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford.  Loan modification is a relatively new term for most people, but with the current market conditions and mortgage crisis, it is becoming increasingly popular.  When possible, loan modification is a preferable alternative to bankruptcy.  Additionally, loan modification is a more fiscally  attractive solution for any lender.

Loan modification programs are typically designed for homeowners who are having difficulty making their mortgage payment, but who can’t qualify to refinance their mortgage.  Loan modification may include reducing the interest rate, extending the term of the loan from 30 to 40 years, or adding missed payments to loan balance.  Loan modifications are not the same as debt consolidations, refinancing loans, or even forbearances.  Loan modifications stop foreclosure proceedings and instead reinstate the loans as they are being modified.

The lenders motivation in modifying a loan is that this is a better alternative to foreclosure.  However, homeowners today are under the false impression that they cannot apply for a home loan modification if they are not in foreclosure.  A loan modification allows the lender to transform a non-performing asset into a performing one and avoid the cost of foreclosure.  The bottom line is that a loan modification is intended to reduce the payments for the borrower, make it more affordable, and reduce the risk that the homeowner will default on the loan.

So here again, loan modification is preferable, in that a renegotiated loan agreement allows you to keep paying down your monthly mortgage while maintaining your credit rating.  Whether it’s reducing the borrower’s note rate or monthly payment, or extending the maturity date, a loan modification is a possible option for a borrower in default.

Understanding the plight facing homeowners today and the very real threat of foreclosure,  assistance during the process of applying for a loan modification is essential. It is important to make the lender work with the homeowner to provide the best possible solution before it is too late.  In the final analysis, loan modification is usually preferable to filing for bankruptcy and is a fundamentally sounder strategy than defaulting on the entire mortgage and creating costly foreclosure proceedings.