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Dec312010

Loan Modification in San Bernardino County, CA: A Guide

Over the past several years, home values have declined drastically in San Bernardino County, Calif. This has positioned many homeowners in an awful situation: their monthly loan payment is too expensive and selling the home is not a good move because it’s valued at less than the mortgage.
 
If you’re in this situation, you may have contemplated loan modification. While loan mod is a practical solution for some homeowners, a short sale is often the best way to reduce debt and increase personal net worth. Home Sales and Loan Modification in San Bernardino County, CAHome Sales and Loan Modification in San Bernardino County, CA
In this guide, I’ll cover loan modification in San Bernardino County, debunk some common myths and aid you in deciding if short sale is the right choice for you. 

What is Loan Modification?

A loan mod is a change to the terms of the note. This can include lowering the loan’s interest rate or stretching out the term (number of payments) to hopefully reduce the borrower’s monthly payments.  
 
While a majority of San Bernardino County lenders are willing to stretch out the loan to 40 years, be mindful that most interest rate reductions are short-term. Lenders know that the economy will eventually improve, allowing them to later resume the payments at the elevated rate.

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

Many myths exist about loan mod. In this section, I’ll invalidate three of the most common myths.
  • Myth: In a loan modification forgiveness of accrued penalties, fees and interest on any missed payments is granted. 
  • Reality: The accrued penalties, fees and interest, plus the missed payments, are added to the loan balance in most loan mod cases. 
  • Myth: Payments are reduced in a loan modification.
  • Reality: Most California loan modification cases result in higher payments, due to the addition of built up penalties, fees and interest on missed payments. To make the restructured loan payments appear favorable, lenders are stretching out the loan term to 40 years and giving small reductions in the interest rate for two to five years. However, in more than 30 percent of loan mod cases, payments are higher after the loan modification, according to the Fitch Bank Rating Agency.
  • Myth: The principal balance go down in a loan mod.
  • Reality: This happens only in rare instances, usually only when complex legal or financial matters are being negotiated or litigated with the lender. 
Taking into account the realities of loan modification, short sale is often the favorable solution for San Bernardino County homeowners looking to reduce debt and gain personal net worth.

Quick Tip

A forbearance agreement is not the same as a loan modification. In forbearance agreements, the back payments are restructured, but the original terms and conditions of the loan remain the same. As a result, payments go up with forbearance agreements since the back payments are being paid off over time.  

How to Pursue a Loan Modification in San Bernardino County, CA

Here are the most common strategies for pursuing a loan modification in San Bernardino County:
  1. Apply directly with the lender. Since most homeowners are unable to negotiate substantial reductions to the interest rate and debt, the lender prefers this method. 
  2. Work with a San Bernardino County loan mod company, which is usually attorney- or real estate broker-owned. Loan mod companies are experienced and sometimes have success in dealing with legal issues in order to obtain favorable interest rates and debt reductions. Though, it should be observed that the success rate in this industry isn’t great overall for most homeowners.
  3. Work with an experienced California short sale investor or negotiator. While this may sound strange, this is actually a very sound tactic, especially if affordability is an issue. Because lenders often conclude that a short sale will result in greater deficits than loan modification, the mere prospect that a homeowner is considering short sale may cause them to make their best and final loan mod offer. This strategy can be used immediately, but is most often used when the homeowner has reached their financial limits and is unable to get a satisfactory loan modification. 

Loan Modification Eligibility

There are no eligibility requirements for obtaining a loan modification in San Bernardino County, CA; however, the lender and borrower must be able to agree on the change to the loan.
  
There are a few circumstances in which a San Bernardino County lender will be financially inclined to approve a loan modification and others in approval is not as likely.  
 
In general, loan modification approval is more plausible when:
  1. The homeowner has a difficulty that has been resolved or is resolvable soon.
  2. The approval of a permanent loan modification is needed to make the non-performing loan turn into a permanently performing loan once again.
A “trial” loan modification will be granted in most cases. To participate in a trial loan mod in San Bernardino County, lenders usually require the homeowner to make monthly payments at a set rate for a minimum of three months prior to giving permanent approval. Regrettably, this creates a trap for many homeowners, since the lender might never give permanent approval of the loan modification.  
 
Loan mod approval is unlikely when:
  1. The lender concludes that the borrower cannot afford to pay for the home.
  2. The lender disagrees that a borrower's adversity is resolvable by loan modification.
  3. The lender infers that the borrower might continue making the loan payments even if permanent approval is not provided. For example, if lender concludes that the borrower wants to keep the property “no matter what,” there is little motivation to grant permanent approval.

Most Loan Mods are Destined to Fail

The typical loan mod payment is 64% of pre-tax income, as per the Fitch Bank Rating Agency. In contrast, lenders typically will not approve a new loan if the payments go over 35% of pre-tax income. The reason for this is that they understand that for a loan to thrive and avoid becoming a non-performing loan, a reasonable portion of income is needed for the borrower’s other household necessities.
 
This exceptionally high payment requirement causes loan modification to be an unworkable program destined to fail, as stated by Fitch and others. In its assessment, Fitch has criticized the banks’ handling of loan modifications, due to the low permanent loan mod approval rate and the high failure rate after permanent loan mod approval is granted.
 
Unfortunately, state and federal laws and government regulations haven’t been able to force banks to do more to help borrowers prevent foreclosure. This is due to their inability to force banks to absorb more of the monetary losses that have resulted from the housing crisis.

Is Loan Modification Right for You?

Loan mods are not economically sound for the vast majority of San Bernardino County homeowners, due to the considerable drop in housing values. If you’re hoping to lower your debts and expenses, a short sale can significantly reduce your debt and boost personal net worth at the same time.
 
Additionally, if you need a loan modification in San Bernardino County, CA, yet have little or no equity, a short sale is a great tactic to get your bank to make a reasonable loan modification offer.
 
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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