When a homeowner calls an appraiser for foreclosure purposes, it typically means that the homeowner is facing financial difficulties and is in danger of defaulting on their mortgage loan. A foreclosure appraisal is an estimate of the value of the property that is used to determine the amount of money that the lender can recover if the property is sold in a foreclosure sale.
The primary advantage of obtaining a foreclosure appraisal is that it can provide the homeowner with a more accurate understanding of the current value of their property. This information can be used to negotiate with the lender or to seek out other options for avoiding foreclosure, such as a loan modification or short sale.
Let’s say a homeowner is struggling to keep up with their mortgage payments and is at risk of defaulting on their loan. They contact their lender to explore the possibility of a loan modification, which could involve lowering their interest rate, extending the repayment term, or even reducing the principal balance.
To determine whether the homeowner is eligible for a loan modification, the lender will need to assess the current value of the property. If the property has decreased in value since the time the mortgage was originated, the lender may be more willing to offer a loan modification because they are at risk of losing money if the property goes into foreclosure.
This is where an appraisal can be very helpful. An appraiser can provide an unbiased estimate of the current value of the property, taking into account factors such as the local real estate market, comparable sales in the area, and any changes or improvements made to the property since the original mortgage was issued.
If the appraisal shows that the property is worth less than the outstanding balance on the mortgage, the lender may be more willing to offer a loan modification because they realize that a foreclosure could result in them losing money. On the other hand, if the appraisal shows that the property is worth more than the outstanding balance on the mortgage, the homeowner may have more negotiating power to seek better terms for the loan modification.
An example of a positive loan modification scenario where the owner had a mortgage of $250,000 but the house appraised at 290,000,
Let’s say a homeowner has a mortgage of $250,000 with a fixed interest rate of 5% and a monthly payment of $1,342.05 for a 20-year term. However, due to financial difficulties, the homeowner is struggling to keep up with the payments and is at risk of defaulting on the loan.
The homeowner contacts the lender to explore the possibility of a loan modification. An appraiser is called in to assess the current value of the property, and the appraisal comes in at $290,000.
Based on the appraisal, the lender determines that the homeowner is eligible for a loan modification. The lender offers to extend the loan term to 30 years and reduce the interest rate to 4.5%.
Under the modified terms, the homeowner’s new monthly payment would be $1,268.03, a reduction of $74.02 per month. This makes the payments more affordable and manageable for the homeowner.
Additionally, the lender agrees to apply the difference between the original loan balance and the new appraised value of the property, which is $40,000 in this case, to the principal balance of the loan. This reduces the homeowner’s outstanding balance to $210,000, further reducing their monthly payment.
In the above scenario, if the additional $40,000 was used to reduce the principal, and the interest rate remained at 4.5% with a 30-year term, the reduced principal balance would be $210,000 then the new monthly payment would be $1,064.04.
To calculate the monthly payment, we can use a mortgage calculator that takes into account the loan amount, interest rate, and term. Using these values, the calculation would be as follows:
P = A * [(r/12) * (1 + r/12)^n] / [(1 + r/12)^n – 1]
Where:
- P = monthly payment
- A = loan amount ($210,000 in this case)
- r = monthly interest rate (4.5% / 12 = 0.00375)
- n = number of payments (30 years * 12 months = 360)
Plugging in these values, we get:
P = $210,000 * [(0.00375) * (1 + 0.00375)^360] / [(1 + 0.00375)^360 – 1] P = $1,064.04 (rounded to the nearest cent)
So the new monthly payment would be $1,064.04 after applying the additional $40,000 to the principal balance of the loan.
The lender benefits by avoiding the costs and risks associated with foreclosure and potentially losing money on the property.
Overall, this example demonstrates how an appraisal can help in the loan modification process by providing an objective estimate of the property’s value and enabling both the homeowner and lender to make more informed decisions about the terms of the modification and assist the home owner in avoiding a foreclosure.
