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Dec312010

Loan Modification in Riverside, CA: A Guide

The value of homes in Riverside, Calif., have declined considerably over the past several years, placing many homeowners in an unfeasible situation: their monthly loan payment is too expensive and selling the home is not a good alternative because its value is lower than the mortgage. 
 
If you’ve found yourself in this situation, you may have considered loan mod. While loan modification is a viable option for a few homeowners, a short sale is often the right solution for reducing debt and growing personal net worth. Home Sales and Loan Modification in Riverside, CAHome Sales and Loan Modification in Riverside, CA
In this guide, I’ll clarify loan modification in Riverside, debunk some common myths and assist you in deciding if short sale is the better option for you. 

What is Loan Modification?

A loan mod is a restructuring of the terms of the note, which can include reducing the loan’s interest rate or lengthening the term (number of payments) with the hope of lowering the homeowner’s monthly payments.  
 
While most Riverside lenders are open to extending the loan to 40 years, be aware that most interest rate cuts are only temporary. The logic behind this is that the economy will get better, permitting the lender to bring the payments back up to the previously higher rate.

Myths and Realities of Loan Mod in Riverside, Calif.

Myths about loan modification are widespread. In this section, I’ll debunk three common myths.
  • Myth: Loan mod grants forgiveness of built up penalties, fees and interest on any missed payments. 
  • Reality: The accrued penalties, fees and interest from the missed payments are being added to the loan balance by the lenders. 
  • Myth: The principal balance goes down in a loan modification.
  • Reality: Reductions to the principal balance happen only in rare cases, generally when complex legal or financial matters are being negotiated or litigated with the lender. 
  • Myth: Payments are reduced with a loan mod.
  • Reality: In a very large number of California loan mod cases, payments go up due to the addition of built up penalties, fees and interest on missed payments. Lenders are lengthening the loan term to 40 years and may offer small reductions in the interest rate for two to five years to make the loan mod look attractive. It should be noted that in more than one third of cases, loan mod payments are higher than before the modification, according to the Fitch Bank Rating Agency.
With the realities of loan modification in mind, short sale is often the better alternative for Riverside homeowners wanting to free themselves from debt and increase personal net worth.

Quick Tip

Loan modification and forbearance agreements are not identical. With a forbearance agreement, the back payments owed are restructured without changing the original terms and conditions of the loan. Therefore, payments will go up with forbearance agreements because the back payments are being repaid over time.  

How to Pursue a Loan Mod in Riverside, CA

Typical methods for obtaining a loan modification in Riverside include:
  1. Working with a Riverside loan mod company. These companies are usually attorney- or real estate broker-owned. They are highly skilled and can have success in addressing legal issues in order to attain favorable interest rates and debt reductions. It should be noted, however, that the success rate in this industry is not great overall for most homeowners.
  2. Applying directly with the lender. The lender prefers this strategy because most homeowners can’t negotiate significant reductions to the interest rate and debt.
  3. Working with a skilled CA short sale investor or negotiator. Even though this may sound odd or contradictory, this tactic is very smart, especially if affordability is an issue. Because lenders often conclude that a short sale will result in more losses than loan modification, the possibility that a homeowner is contemplating short sale may cause them to make their best and final loan mod offer. This approach can be used initially, but is most commonly used when the borrower is at the end of their rope financially and is not able to get a satisfactory loan modification. 

Loan Modification Eligibility

Obtaining a loan mod in Riverside, CA, requires no official eligibility requirement, though the lender and borrower have to reach an agreement on the change to the loan.
 
There are some conditions in which a Riverside lender will be financially motivated to approve a loan modification and others in which approval is less likely.  
Typically, loan mod approval is more likely when:
  1. The homeowner has a period of difficulty that has been resolved or is resolvable shortly.
  2. The approval of a permanent loan mod is absolutely essential to make the non-performing loan develop into a permanently performing loan once again.
Approval of a “trial” loan mod will be granted in nearly every case. To participate in a trial loan modification in Riverside, borrowers are usually required to make monthly payments at a set amount for a minimum of three months prior to receiving permanent approval. Regrettably, the lender might never grant permanent approval of the loan mod, placing many borrowers in a trap.  
 
The lender is likely to deny loan modification when:
  1. It’s determined that the borrower doesn’t have the funds to pay for the property.
  2. The lender believes that a borrower's hardship is not resolvable by loan mod.
  3. The lender strongly believes that the homeowner might continue to make the loan payments despite the lack of permanent approval. For example, if lender concludes that borrower desires to keep the home “no matter what,” the lender will be unmotivated to provide permanent approval.

Most Loan Mods are Destined to Fail

According to the Fitch Bank Rating Agency, the typical loan mod payment is 64% of pre-tax income. However, lenders normally will not approve a new loan if the payments surpass 35% of pre-tax income since they understand that for a loan to thrive and avoid becoming a non-performing loan, borrowers must be able to dedicate a reasonable portion of their income for other household expenses.
 
This tremendously high payment requirement makes loan mod an unworkable program destined to be unsuccessful, according to Fitch and others. In its assessment, Fitch has been criticized the banks’ handling of loan mods, due to their low approval rate of permanent loan modifications and the high rate of loan modification failures after permanent approval is provided.
 
Regrettably, federal and state laws and government regulations have been powerless to force banks to do more to help homeowners stop foreclosure, due to their incapacity to pressure banks into absorbing more of the monetary losses that have resulted from the housing crisis.

Is Loan Modification Right for You?

Loan mods are not economically wise for the vast majority of Riverside homeowners, due to the large drop in housing values. If reducing your debts and expenses is your concern, a short sale can significantly reduce your debt, while also increasing personal net worth.
 
If you have little or no equity, yet desire a loan modification in Riverside, a short sale can be used as an approach to get your bank to make a practical 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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