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Dec312010

Loan Modification in San Bernardino, CA: A Guide

The value of homes in San Bernardino, Calif., have declined considerably over the past several years. This has positioned many homeowners in an impossible predicament: their monthly loan payment is no longer affordable and selling the home is not a good alternative because its value is less than the loan.

If you’re in this situation, you may have considered loan modification. While loan mod is a workable option for some homeowners, a short sale is generally the right solution for reducing debt and growing personal net worth. Home Sales and Loan Modification in San Bernardino, CAHome Sales and Loan Modification in San Bernardino, CA
In this guide, I’ll go through loan modification in San Bernardino, debunk some common myths and aid you in deciding if short sale is the better option for you. 

What is Loan Modification?

In loan mod, the terms of the note are restructured, which may include reducing the loan’s interest rate or lengthening the term (number of payments) to hopefully decrease the homeowner’s monthly payments. 
 
While most San Bernardino lenders will extend the loan to 40 years, take note that most interest rate reductions are short term. The logic behind this being that the economy will eventually get better, permitting the lender to later return the payments to the formerly higher rate.

Myths and Realities of Loan Modification in San Bernardino, Calif.

There are countless myths about loan mod. In this section, I’ll debunk three of the most frequently heard myths.
  • Myth: In a load mod, accrued penalties, fees and interest on any skipped payments will be forgiven. 
  • Reality: Lenders are electing to add the built up penalties, fees and interest from the missed payments in to the balance of the loan. 
  • Myth: Payments decrease with a loan modification.
  • Reality: In the majority of California loan modification cases, payments increase due to the addition of accumulated penalties, fees and interest on missed payments. Lenders are lengthening the loan term to 40 years and may offer minor reductions in the interest rate for two to five years, to make the loan mod payments look beneficial. However, loan modification payments increase after the loan modification in more than 30 percent of cases, according to the Fitch Bank Rating Agency.
  • Myth: The principal balance decreases in a loan modification.
  • Reality: Reductions to the principal balance are very rare. These reductions are apt to occur when complex legal or financial matters are being negotiated or litigated with the lender. 
When the realities of loan modification are considered, short sale is often a better option for San Bernardino homeowners looking to liberate themselves from debt and increase personal net worth.

Quick Tip

Loan mod is not equal to a forbearance agreement. Forbearance agreements entail structuring of the back payments owed without making any changes to the original terms and conditions of the loan. Consequently, payments will go up with forbearance agreements since the back payments are being paid off over time. 

How to Pursue a Loan Modification in San Bernardino, CA

Some typical methods for pursuing a loan mod in San Bernardino include:
  1. Applying directly with the bank. This is the approach preferred by the bank because most homeowners are incapable of negotiating significant reductions to the interest rate and debt.
  2. Partnering with a San Bernardino loan mod company. These companies are typically attorney- or real estate broker-owned. Loan modification companies are highly proficient and sometimes have success in dealing with legal issues in order to obtain good interest rates and debt reductions.  However, it’s important to note that the success rate in this industry is undesirable overall for most homeowners.
  3. Working with an experienced CA short sale investor or negotiator. Though this may sound odd or conflicting, this is actually a very solid strategy, especially if affordability is important. Because lenders often establish that a short sale will result in additional losses than loan modification, the mere possibility that a homeowner is calling it quits may prompt them to make their best and definitive loan modification offer. This plan can be used initially, but is most frequently used when the homeowner is stretched to the limits financially and incapable of getting a satisfactory loan modification. 

Loan Modification Eligibility

To obtain a loan modification in San Bernardino, CA, there’s no official criterion to meet; however, the lender and borrower must be able to arrive at an agreement on the change to the loan.
 
In some circumstances, a San Bernardino lender will be more financially motivated than others to approve a loan modification.
 
Typically, loan modification is more apt to be approved when:
  1. The borrower has a hardship that has been taken care of or is resolvable soon.
  2. Approval of a permanent loan modification is a must to take the loan from non-performing loan to a permanently performing loan once again.
A “trial” loan modification approval can be acquired in nearly all cases. To take part in a trial loan modification in San Bernardino, lenders commonly require the borrower to make monthly payments at a set upon amount for at least three months before granting permanent approval. Though, this entraps many borrowers because the bank might never provide permanent loan mod approval.  
 
Loan modification is unlikely to be granted when:
  1. The lender discovers that the homeowner cannot afford the property.
  2. The lender does is not in agreement that a borrower's adversity is resolvable by loan mod.
  3. The lender determines that the borrower might make the loan payments despite the lack of permanent loan mod approval. For example, if the lender concludes that borrower wants to keep the home under any circumstances, the lender has no motivation to provide permanent approval.

Most Loan Mods are Destined to Fail

The usual loan modification payment is 64% of pre-tax income, states the Fitch Bank Rating Agency. In contrast, lenders commonly will not approve a new loan if the payments surpass 35% of pre-tax income because they realize that in order to maintain their loan payments, homeowners need to be able to reserve a reasonable portion of their income for other household essentials.
 
Due to this exceedingly high payment requirement, loan mod is an unworkable program destined to fall short, according to Fitch and others. In its assessment, Fitch has judged the banks’ handling of loan modifications, due to the low approval rate of permanent loan modifications and the consequently high failure rate of following permanent loan mod approval.
 
Federal and state laws and government regulations have been powerless to force banks to commit more resources to help homeowners prevent foreclosure, due to their incapability of pressuring banks into absorbing more of the financial losses that are resulting from the housing crisis.

Is Loan Modification Right for You?

On account of the major drop in housing values, loan mods are not economically wise for most of San Bernardino homeowners. If you would like to lower your debts and expenses, a short sale can considerably reduce your debt and increase personal net worth simultaneously.
 
Also, if you desire a loan mod in San Bernardino, CA, yet have meager or no equity, a short sale can be employed as a strategy to get your lender to make a reasonable 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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