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Dec312010

Loan Modification in Oakland, CA: A Guide

Home values in Oakland, Calif., have declined drastically over the past several years. This has placed many homeowners in a difficult situation: their monthly loan payment is no longer affordable and selling the home is not a viable choice because its value is less than the mortgage.
  
If you’ve found yourself in this position, you may have wondered if loan modification could help. While loan mod is a workable option for some homeowners, a short sale is often the better solution for slashing debt and increasing personal net worth. Home Sales and Loan Modification in Oakland, CAHome Sales and Loan Modification in Oakland, CA
In this guide, I’ll cover loan modification in Oakland, uncover some common myths and help you decide if short sale is the right choice for you. 

What is Loan Modification?

With a loan mod, the terms of the note are restructured. This can include reducing the loan’s interest rate or lengthening the term (number of payments) in an attempt to reduce the homeowner’s monthly payments.
  
While most Oakland lenders will extend the loan to 40 years, it’s important to note that most interest rate reductions are only short-term. The reason behind this is that the economy will eventually get better, permitting the lender to later continue the payments at the previously higher rate.

Myths and Realities of Loan Modification in Oakland, Calif.

There are many myths about loan modification. In this section, I’ll uncover three of the most common myths.
  • Myth: Loan mod will grant forgiveness of built up penalties, fees and interest on any missed payments. 
  • Reality: Lenders are opting to include the built up penalties, fees and interest from the missed payments with the loan balance. 
  • Myth: Payments will reduce with a loan modification.
  • Reality: In a very large percentage of California loan mod cases, payments increase due to the addition of built up penalties, fees and interest on missed payments. To make the restructured loan payments seem beneficial, lenders are extending the loan term to 40 years and might offer small reductions in the interest rate for two to five years. However, in more than 30 percent of cases, loan modification payments will be higher than prior to the loan mod, according to the Fitch Bank Rating Agency.
  • Myth: The principal balance will be reduced in a loan mod.
  • Reality: Decreases in the principal balance occur only in rare instances, such as when complex legal or financial issues are being negotiated or litigated with the lender. 
Based on the realities of loan mod, short sale is often the preferred option for Oakland homeowners looking to clear themselves of debt and gain personal net worth.

Quick Tip

Loan mod is not equal to a forbearance agreement. In forbearance agreements, back payments owed are restructured without altering the original terms and conditions of the loan. In forbearance agreements, payments will increase because the back payments are being repaid over time.  

How to Obtain a Loan Modification in Oakland, CA

The most common strategies for obtaining a loan mod in Oakland include:
  1. Applying with the lender directly. Lenders prefer this method because most homeowners are incapable of negotiating significant reductions to the interest rate and debt.
  2. Working with an Oakland loan modification company. Loan mod companies are usually attorney- or real estate broker-owned, are highly skilled and can have success in addressing legal issues in order to secure favorable interest rates and reductions in debt. Yet, it should be noted that the success rate in this industry is objectionable overall for most homeowners.
  3. Partnering with a skilled California short sale investor or negotiator. While this may sound strange, this strategy is very sound, especially if affordability is a priority. Because lenders often conclude that a short sale will result in more significant losses than loan mod, the possibility that a homeowner is leaning toward a short sale may cause them to make their best and final loan mod offer. This strategy can be used right away, but is most often employed when the borrower is stretched financially and is not able to get a satisfactory loan mod. 

Loan Mod Eligibility

There is no official eligibility requirement for getting a loan mod in Oakland, CA, although the lender and borrower must come to an agreement on the change to the loan.
 
There are some circumstances in which an Oakland lender will be financially motivated to grant a loan modification and others in which the lender will be unlikely to give approval.  
In general, loan mod is more likely to be granted when:
  1. The homeowner has a hardship that has been sorted out or will be sorted out soon.
  2. The approval of a permanent loan mod is absolutely required to make the non-performing loan perform permanently once again.
A “trial” loan mod can be obtained in nearly all cases. To take part in a trial loan modification in Oakland, the borrower is generally required to make monthly payments at an agreed upon amount for at least three months before permanent approval will be granted. Unfortunately, this creates a trap for many borrowers because the lender might never grant permanent loan modification approval.
  
A lender is likely to deny or not permanently approve a loan mod when:
  1. They determine that the borrower can’t afford the home.
  2. They disagree that a loan mod will resolve a borrower's hardship.
  3. They conclude that the borrower may make the house payments even if the lender denies permanent approval. For example, if lender believes that the borrower wants to keep the home “no matter what,” there is no incentive to provide permanent approval.

Most Loan Modifications are Destined to Fail

According to the Fitch Bank Rating Agency, the average loan mod payment is 64% of pre-tax income. In contrast, lenders usually will not approve a new loan if the payments are over 35% of pre-tax income. They do this because they realize that for a loan to be successful, borrowers must be able to dedicate a reasonable portion of their revenue for other household necessities.
 
According to Fitch and others, this exceptionally high payment requirement makes loan mod an unworkable program destined to fail. In its assessment, Fitch has been critical of the banks’ handling of loan modifications, because of the low approval rate of permanent loan modifications and the high failure rate of loan mods after permanent approval is granted.
 
Unfortunately, federal and state laws and government regulations haven’t been able to force banks to do more to help homeowners prevent foreclosure, due to their failure to pressure banks into absorbing more of the financial losses that are resulting from the housing crisis.

Is Loan Mod Right for You?

Because of the considerable drop in housing values, loan modifications are not economically wise for most of Oakland homeowners. If you would like to reduce your debts and expenses, a short sale can drastically reduce your debt and increase personal net worth concurrently.
 
Additionally, if you hope to obtain a loan modification in Oakland, CA, yet have little or no equity, a short sale can be employed as a strategy to get your lender to make a reasonable loan mod proposal.
 
For more information on California loan mod 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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