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Dec312010

Loan Modification in Riverside County CA: A Guide

In Riverside County, Calif., home values have taken a nosedive 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 good option because its value is less than the mortgage.
 
If you’re in this situation, you may have thought about loan modification. While loan mod is a reasonable option for some homeowners, a short sale in California is often the better solution for reducing debt and boosting personal net worth.Home Sales and Loan Modification in Riverside County CAHome Sales and Loan Modification in Riverside County CA
In this guide, I’ll go over loan modification in Riverside County, debunk some typical myths and help you decide if short sale is the better choice for your situation. 

What is Loan Modification?

The terms of the note are restructured in loan modification. The restructure can include a reduction in the loan’s interest rate or an extension in the term (number of payments) to hopefully lower the homeowner’s monthly payments.
 
While most Riverside County lenders are able to extend the loan to 40 years, please note that most interest rate reductions are only short term because the economy will eventually get better, permitting the lender to later bring the payments back to the previously higher rate.

Myths and Realities of Loan Modification in Riverside County, Calif.

Many myths about loan mod exist. In this section, I’ll discredit three of the most common myths.
  • Myth: A loan modification lowers payments.
  • Reality: Payments increase in a very large percentage of California loan modification cases, due to the addition of built up penalties, fees and interest on missed payments. To make the restructured loan payments look good, lenders are extending the loan term to 40 years and might offer slight reductions in the interest rate for two to five years. Though, according to the Fitch Bank Rating Agency, in more than one third of cases, loan modification payments are higher than prior to the loan modification.
  • Myth: Accrued penalties, fees and interest are forgiven on any missed payments with a loan modification. 
  • Reality: Lenders are adding the accrued penalties, fees and interest from the missed payments to the loan balance. 
  • Myth: A loan mod will reduce the principal balance.
  • Reality: This happens only in rare instances. These principal balance reductions usually occur only when complicated legal or financial issues are being negotiated or litigated with the bank. 
Due to the realities of loan modification, short sale is often the best option for Riverside County homeowners looking to rid themselves of debt and gain personal net worth.

Quick Tip

Loan mod is not the same as a forbearance agreement. These agreements are a structuring of the back payments owed; however, the original terms and conditions of the loan are unchanged. Due to this, payments increase with forbearance agreements since the back payments are being paid off over time.  

How to Pursue a Loan Mod in Riverside County, CA

The most common tactics for pursuing a loan mod in Riverside County include:
  1. Applying directly with the bank. This is the strategy preferred by the lender since most homeowners are powerless to negotiate significant reductions to the interest rate and debt.
  2. Working with a Riverside County loan modification company, which is usually attorney- or real estate broker-owned. Loan mod companies are highly skilled and occasionally have success in tackling legal issues in order to secure favorable interest rates and debt reductions. Yet, it should be noted that the success rate in this industry is not acceptable overall for most homeowners.
  3. Working with a skilled Riverside County short sale investor or negotiator. This may sound strange or contradictory; however, this is actually a very wise strategy, especially if affordability is an issue. Since lenders often determine that a short sale will cause greater losses than loan modification, the mere idea that a homeowner is calling it quits may motivate them to make their best and final loan mod offer. This tactic can be used initially, but is most often employed when the borrower is stretched to the limits financially and incapable of obtaining a satisfactory loan modification. 

Loan Modification Eligibility

Officially, there is no eligibility prerequisite for obtaining a loan mod in Riverside County, CA, although the lender and borrower have to reach an agreement on the alteration to the loan.
 
There are some situations in which a Riverside County lender will be financially motivated to allow a loan modification and others in which the lender is not prone to granting approval.  
Loan mod is more likely to be approved when:
  1. The homeowner has a financial difficulty that has been resolved or is resolvable in the near future.
  2. A permanent loan modification approval is a must to make the non-performing loan become a permanently performing loan once more.
A “trial” loan mod can be obtained in nearly all cases. To partake in a trial loan modification in Riverside County, lenders normally require the borrower to make monthly payments at an established amount for a minimum of three months before giving permanent approval. Regrettably, this causes a trap for many borrowers because the lender might never grant permanent approval of the loan mod.  
 
Loan mod is likely to be denied or not permanently approved when:
  1. The lender determines that the homeowner cannot afford the property.
  2. The lender believes that a borrower's hardship is not resolvable by loan mod.
  3. The lender determines that the borrower might make the loan payments whether or not the lender provides permanent approval. For example, if lender believes that the borrower wants to keep the home “no matter what,” the lender has no reason to provide permanent approval.

Most Loan Mods are Destined to Fail

The typical loan mod payment is 64% of pre-tax income, according to the Fitch Bank Rating Agency. In contrast, lenders normally will not support a new loan if the payments go beyond 35% of pre-tax income because they recognize that for a loan to be successful and avoid becoming a non-performing loan, borrowers must be able to allot a reasonable portion of their income for other household essentials.
 
This exceptionally high payment requirement makes loan modification an unfeasible program destined to fail, according to Fitch and others. In its assessment, Fitch has disapproved of the way the banks have handled loan mods, due to the low approval rate of permanent loan mods, plus the subsequently high failure rate of loan mods after permanent approval is granted.
 
Unfortunately, federal and state laws and government regulations have been unable to pressure banks into doing more to help homeowners avoid foreclosure, due to their inability to force banks into absorbing more of the monetary losses that have resulted from the housing crisis.

Is Loan Mod Right for You?

Due to the sizeable decrease in housing values, loan modifications are not economically wise for the wide majority of Riverside County homeowners. If you are concerned with lowering your debts and expenses, a short sale can radically reduce your debt and increase personal net worth at the same time.
 
In addition, if you desire a loan mod in Riverside County, CA, yet have little or no equity, a short sale is a great tactic to get your bank to make a reasonable loan mod 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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