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Dec312010

Loan Modification in Modesto, CA: A Guide

In Modesto, Calif., home values have declined considerably over the past few years. This has placed many homeowners in a difficult situation: their monthly loan payment is too high and selling the home is not possible because its value is less than the mortgage.

Have you found yourself in this position? If so, you may have thought about a loan modification. While loan mod is a good option for some homeowners, a short sale is often the right solution for reducing debt and increasing personal net worth.Home Sales and Loan Modification in Modesto, CAHome Sales and Loan Modification in Modesto, CA
In this guide, I’ll explain loan modification in Modesto, uncover some common myths and help you decide if short sale is the right choice for you. 

What is Loan Modification?

In a loan modification, the terms of the note are restructured, which can include lowering the loan’s interest rate or extending the term (number of payments) to hopefully reduce the monthly loan payments.  
 
While most Modesto lenders are willing to stretch the loan to 40 years, be aware that most interest rate reductions are short-term. The lender’s logic behind this is that the economy will ultimately improve, permitting them to later resume the payments to the previously higher rate.

Myths and Realities of Loan Modification in Modesto, Calif.

There are many misconceptions about loan mod. In this section, I’ll debunk three of the most common myths.
  • Myth: Loan modification will grant forgiveness of accrued penalties, fees and interest on any missed payments. 
  • Reality: Lenders are choosing to add the accrued penalties, fees and interest from the missed payments on top of the loan balance.
  • Myth: Payments will go down with a loan modification.
  • Reality: In a sizeable number of loan modification cases in California, payments go up due to the addition of accrued penalties, fees and interest on missed payments. To make the newly restructured loan payments appear worthwhile, lenders are extending the loan term to 40 years and may offer slight reductions in the interest rate for 2 to 5 years. However, in more than one third of instances, loan modification payments will be higher than prior to the loan modification, according to the Fitch Bank Rating Agency.
  • Myth: The principal balance will go down in a loan modification.
  • Reality: Reductions to the principal balance occur only in unusual instances, such as when complex legal or financial matters are being negotiated or litigated with the lender. 
Due to the harsh realities of loan modification, short sale is often the best option for Modesto homeowners looking to get rid of debt and gain personal net worth. 

Quick Tip

Loan modification is not the same as a forbearance agreement. In forbearance agreements, the back payments are restructured to include the back payments without changing the original terms and conditions of the loan. Because the back payments are being paid off, payments increase with forbearance agreements.  

How to Pursue a Loan Modification in Modesto, CA

The most common options for pursuing a loan modification in Modesto include:
  1. Applying directly with the lender. The lender prefers this method because most homeowners are unable to negotiate considerable reductions to the interest rate and debt.
  2. Working with a Modesto loan mod company. These companies are usually attorney- or real estate broker-owned. Loan modification companies are very talented and sometimes are successful in addressing legal issues in order to obtain favorable interest rates and debt reductions.  However, it should be noted that the rate of success for homeowners in this industry is generally unacceptable.
  3. Working with a skilled California short sale investor or negotiator. While this may sound strange, this method is actually very sound, especially if affordability is an issue. Because lenders often realize that a short sale will result in greater losses than loan modification, the mere prospect that a homeowner is going for a short sale may cause them to make their best and final loan modification offer. This approach can be used initially, but is commonly used when the borrower is strapped financially and unable to get a reasonable loan modification. 

Loan Modification Eligibility

There are no eligibility requirements for getting a loan mod in Modesto, CA. However, the lender and borrower must be able to come to an agreement on the loan changes.
 
In some circumstances, a Modesto lender will be financially motivated to approve a loan mod and in others will be less likely to give approval.  
 
In general, loan modification is more likely to be accepted when:
  1. The homeowner has a resolved hardship or will resolve it soon.
  2. The only way to make a loan perform again (permanently) is to grant approval of a permanent loan modification.
You’ll be able to gain approval of a “trial” loan modification in nearly all cases. To participate in a trial loan modification in Modesto, lenders usually require the borrower to make monthly payments at an agreed upon amount for at least three months before granting permanent approval. Regrettably, many borrowers fall into a trap here because they may never receive permanent loan mod approval from the lender. 
 
Loan modification is unlikely to be approved when:
  1. The lender determines that the homeowner cannot afford the property.
  2. The lender disagrees that a borrower's hardship will be resolved through loan modification.
  3. The lender believes that the borrower may make the loan payments whether or not permanent approval is given. For example, if the lender thinks that the borrower wants to keep the property under any circumstances, the lender has no incentive to provide permanent approval.

Most Loan Mods are Destined to Fail

The typical loan modification payment is 64% of pre-tax income, according to the Fitch Bank Rating Agency. However, lenders generally will not approve a new loan if the payments are more than 35% of pre-tax income. The reason they do this is because they understand that, borrowers need to be able to allocate a realistic potion of their income for other household necessities to avoid falling behind on their loan.
 
This exceptionally high payment requirement makes loan modification an unworkable program destined to fail, according to Fitch and others. In its assessment, Fitch has criticized how the banks handled loan mods, due to the low approval rate of permanent loan modifications and the high failure rate of loan modifications after permanent approval is provided.
 
Disappointingly, federal and state laws and government regulations haven’t been able to force banks to do more to help homeowners prevent foreclosure, because they don’t have the ability to pressure banks into absorbing more of the financial losses that are resulting from the housing crisis.

Is Loan Modification Right for You?

Due to the large drop in housing values, loan mods are not financially wise for the vast majority of Modesto homeowners. If you are hoping to lower your debts and expenses, a short sale can dramatically reduce your debt and boost personal net worth at the same time.
 
Furthermore, if you would like a loan modification in Modesto, CA, yet have little or no equity, a short sale can be used as an approach to getting your bank to make a sensible loan modification proposal.
 
For more information on California loan modification and short sale, download my free e-book, “Loan Mods, Why Short Sale May Be A Better Option For You,” or give me a call at 1-888-REHelp9.

 

References (1)

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  • Response
    Response: Pilgrim Jewellery
    Loan Modification in Modesto, CA: A Guide - Loan modification CA Cities - Prevent Mortgage Foreclosure -- Short Sale Strategies -- Free Help From California Pro

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