As 2011 gets in full gear with the economy still lagging behind, many homeowners find that they are unable to pay their mortgages. In addition, their banks are no longer willing to do loan modifications. In fact many banks are now encouraging their delinquent mortgage customers to do a short sale or deed in lieu of foreclosure.

Why would a bank choose foreclosure over a loan modification?

It goes against all common sense that if someone owes you (the bank) $400,000 and agrees to pay it back with a modified loan the bank would be better off than foreclosing at the home's current price of $250,000.

Unfortunately for those seeking a modification the banks have seen the results of many modifications and it seems at the moment that a large portion of those that receive modifications end up losing their home to foreclosure anyways. As a result many banks won't even bother with a loan modification.

The main reason is that banks know that property values will decrease in the months to come. So they make more money now by foreclosing on a home now that with a current value of $250,000 . If they wait a year and they and end up with a foreclosure on their books it may only be worth $200,000. That is a $50,000 loss. So for the banks it just simple numbers.

If you have been refused a loan modification it may not be the end of the world. Given recent legislature most lenders will pay you to move out of the property and in some cases even give you up $3500 in moving expenses. For many underwater homeowners this may be a better choice.

If you want to minimize the damage to your credit than you should consider a short sale. In a short sale your bank will allow you to sell your home for it current market value. You can hire a real estate broker to list it and the lender will allow commissions and basic closing expenses to be included as part of the short sale package. A short sale will also give you the ability to stay at your home while its in the process of selling.

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