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Tuesday
Jun292010

Loan Modification-California vs. Other Options

A California loan modification can be a useful strategy.  However, it needs to make sense financially for both the lender and the homeowner. 

Lenders' Lack of Incentives to Grant Loan Modification-California

Lenders generally lack the incentive to grant permanent loan modifications to homeowners who:

  • Have no hardship.  The loan modification is granted to solve a problem.  If there is not a problem that it will solve, then why do it?
  • Have unresolved or unresolvable hardships.  If the hardship is not resolved or resolvable in the near future, then it is starting to look like the homeowner cannot afford the property.
  • Cannot afford the property.  If the homeowner cannot afford the property, it makes more sense for the lender to foreclose and sell the property to someone who can afford the monthly payments.  Despite this lack of affordability issue, lenders are likely to grant a "temporary" loan modification. (See below for the reason.)
  • Are likely to make the monthly payments without the lender’s financial assistance.  Why should the lender incur losses if they don’t need to?

Permanent loan modifications are more likely to be granted where a hardship existed that has been resolved.  By providing the loan modification, the lenders are helping the homeowners so they can begin to make their loan payments once again based on the hope that they can keep their home. 

Be Cautious With Lender On Loan Modification-California

A word of caution -- it has been shown that lenders will provide a temporary loan modification when homeowners clearly cannot afford the property.  This helps the lenders by avoiding the risk of having a vacant property.  The lender also will be collecting monthly payments that they might not otherwise receive.  But in the end, this hurts the homeowners because the high payment requirements (averaging 64% of pre-tax income) depletes the homeowners' savings.  Failed loan modification in California can lead to a foreclosure and a bankruptcy.

Lenders are in business to make a profit and they understand the need to give a little bit when it helps them in the long-term.  However, do not expect that lenders will make large reductions in the principal balance just because you heard about it in a radio or television advertisement.  This only happens in limited circumstance when the negotiator understands how to push the lender's buttons.

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