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Friday
Dec312010

Loan Modification in Irvine, CA: A Guide

Over the past several years, home values in Irvine, Calif., have declined substantially, placing many homeowners in an awful situation: their monthly home loan payment is too high and selling the house is unfeasible because its value is less than the mortgage.
 
If you’ve found yourself in this position, you may have contemplated loan modification. While loan mod is a possible solution for some homeowners, a short sale is often the superior solution for lowering debt and increasing personal net worth.Home Sales and Loan Modification in Irvine, CAHome Sales and Loan Modification in Irvine, CA
In this guide, I’ll go over loan modification in Irvine, discredit some common myths and help you conclude if short sale is the best option for you. 

What is Loan Modification?

A loan modification involves restructuring the terms of the note, by reducing the loan’s interest rate or extending the term (number of payments) in the hopes of reducing the homeowner’s monthly payments.
 
Most Irvine lenders are willing to lengthen the loan to 40 years, however, it’s important to note that most interest rate reductions aren’t long-term. The lender’s logic behind this strategy is that the economy will eventually recover, permitting the lender to later continue the payments at the once higher rate.

Myths and Realities of Loan Modification in Irvine, Calif.

There are a number of myths about loan mod. In this section, I’ll go over three of the most common myths.
  • Myth: A loan modification allows for forgiveness of accrued penalties, fees and interest on any missed payments. 
  • Reality: Lenders are adding the accrued penalties, fees and interest from the missed payments to the loan balance. 
  • Myth: Payments will go down with a loan modification.
  • Reality: Payments go up in a many California loan modification cases, due to the addition of accrued penalties, fees and interest on missed payments. Lenders are extending the loan term to 40 years and might offer small reductions in the interest rate for two to five years to make the restructured loan payments seem beneficial. Nonetheless, in 30% of cases, loan modification payments will be higher than before the loan modification, according to the Fitch Bank Rating Agency.
  • Myth: Loan mod will reduce the principal balance.
  • Reality: Principal balance reductions happen only in rare instances. The reduction is most likely to happen when intricate legal or financial issues are being negotiated or litigated with the lender. 
Based on the realities of loan mod, a short sale is often the better option for Irvine homeowners looking to rid themselves of debt and increase personal net worth.

Quick Tip

Loan modification and forbearance agreements are not the same. In forbearance agreements, the back payments are restructured without changing the original terms and conditions of the loan. Because of this, payments will increase with forbearance agreements since the back payments will be paid off over time.  

How to Pursue a Loan Modification in Irvine, CA

Some common methods for trying to obtain a loan modification in Irvine include:
  1. Applying directly with the lender. This method is preferred by the lender because they know that most homeowners aren’t able to negotiate significant reductions to the interest rate and debt.
  2. Working with an Irvine, California loan mod company. These companies are usually attorney- or real estate broker-owned. They are highly skilled and occasionally have success in addressing legal issues in order to obtain satisfactory interest rates and debt reductions. Though, it should be noted that most homeowners find that the success rate in this industry is unacceptable overall.
  3. Working with a skilled California short sale investor or negotiator. While this may sound unusual or conflicting, this strategy makes a lot of sense, especially if affordability is an issue. Sometimes, the possibility that a homeowner is headed toward short sale will cause lenders to make their best and final loan mod offer, because lenders often conclude that a short sale will result in greater losses than loan modification. While this strategy can be used initially, it’s most often used when the borrower is extended too far financially and unable to get a reasonable loan modification. 

Loan Modification Eligibility

There is no eligibility requirement for obtaining a loan modification in Irvine, CA; however, the lender and borrower have to come to an agreement on the modifications to the loan.
 
There are some conditions under which an Irvine lender will be financially motivated to allow a loan modification and others in which the lender is less apt to grant approval.  
 
In general, lenders are more likely to approve loan modification when:
  1. The homeowner’s hardship has been resolved or will be soon.
  2. A permanent loan modification is required to make the non-performing loan become a permanently performing loan once again.
A “trial” loan modification will be approved in nearly all cases. To participate in a trial loan modification in Irvine, lenders usually require the borrower to make monthly payments at set amount for at least three months before granting permanent approval. Unfortunately, this creates a trap for many borrowers, since the lender might never permanently approve the loan mod.  

Loan Modification Potential  Deal Breakers:

  1. The lender believes that a borrower's hardship is not resolvable by loan modification.
  2. The lender determines that the owner cannot afford the property.
  3. The lender concludes that the borrower wants to keep the property “no matter what,” and might make the loan payments even if the lender does not provide permanent approval. In this case, the lender has no incentive to provide permanent approval.

Most Loan Mods are Destined to Fail

According to the Fitch Bank Rating Agency, the average loan modification payment is 64% of pre-tax income. In contrast, lenders generally will not grant a new loan if the payments exceed 35% of pre-tax income because they know that for a homeowner to stay ahead of their loan payments, they need to be able to allot a reasonable potion of their income for other household expenses.
 
According to Fitch and others, this extremely high payment requirement makes loan modification an unfeasible program destined to fail. In its evaluation, Fitch has been critical of the banks’ handling of loan modifications, because of the low approval rate of permanent loan mods and the high failure rate of loan modifications after permanent approval is granted.
 
Unfortunately, federal and CA state loan mod laws and government regulations have been unable to drive banks to do more to help homeowners prevent foreclosure, because of their failure to pressure banks into absorbing more of the financial losses that have resulted from the housing crisis.

Is Loan Modification Right for You?

Due to the substantial drop in housing values, loan mods are not economically wise for most Irvine homeowners. If you are looking to reduce your debts and expenses, a California short sale can help lower your debt and increase personal net worth at the same time.
 
Moreover, if you need a loan modification in Irvine, CA, yet have little or no equity, a short sale can be used as a tool to get your bank to make a realistic loan modification proposal.
 
For more information on California loan modification and short sale, download my free book, “Loan Mods, Why Short Sale May Be A Better Option For You,” or call me at 1-888-REHelp9.

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