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Loan Modification in San Diego, CA: A Guide

A decline in home values in San Diego, Calif., over the past several years has put many homeowners in a difficult situation: their monthly loan payment is too costly and selling the home is not an option because its value is below that of the mortgage.
 
If you’re in this plight, you may have thought about loan modification. While loan mod is a viable option for a few homeowners, a short sale is most frequently the best way to reduce debt and increase personal net worth. Home Sales and Loan Modification in San Diego, CAHome Sales and Loan Modification in San Diego, CA
In this guide, I’ll describe loan modification in San Diego, uncover some common myths and help you decide if short sale is the better option for you. 

What is Loan Modification?

A loan modification is a reconfiguration of the terms of the note. This can comprise of reducing the loan’s interest rate or stretching out the term (number of payments) to hopefully lower the homeowner’s monthly payments.
  
While most San Diego lenders are inclined to extend the loan to 40 years, take note that most interest rate reductions are only provisional. Lenders believe that the economy will eventually improve, allowing them to later bring the payments back up to the previously higher rate.

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

There are a multitude of myths about loan mod. In this section, I’ll invalidate three of the most common myths.
  • Myth: The principal balance will be brought down in a loan modification.
  • Reality: Reductions to the principal balance transpire only in rare instances. These reductions usually come about when complex legal or financial matters are being negotiated or litigated with the bank. 
  • Myth: Loan modification will pardon accrued penalties, fees and interest on any skipped payments. 
  • Reality: Lenders are electing to add the built up penalties, fees and interest from the missed payments to the loan balance. 
  • Myth: A loan mod reduces the monthly payment.
  • Reality: In a number of California loan modification cases, payments rise because the accrued penalties, fees and interest on missed payments are added to the loan balance. To make the restructured loan payments come across as being beneficial, lenders are extending the loan term to 40 years and offering slight reductions in the interest rate for two to five years. However, in over one third of cases, loan payments will be higher after the loan modification, on the authority of the Fitch Bank Rating Agency.
When the realities of loan modification are considered, short sale is usually is a better option for San Diego homeowners looking to reduce debt and gain personal net worth.

Quick Tip

Loan mod is not equivalent to a forbearance agreement. In forbearance agreements, back payments owed are restructured though no alterations are made to the original terms and conditions of the loan. In forbearance agreements, payments will go up because the back payments are being repaid over time. 

How to Pursue a Loan Modification in San Diego, CA

Some common strategies for trying to obtain a loan mod in San Diego include:
  1. Applying directly with the lender. The lender prefers this tactic because they know that the majority of homeowners aren’t able to negotiate sizeable reductions to the interest rate and debt.
  2. Working with a San Diego loan mod company. These companies are usually attorney- or real estate broker-owned. They are highly talented and may have success in addressing legal issues in order to get satisfactory interest rates and debt reductions. Though, bear in mind that most homeowners find that the success rate in this industry is not satisfactory overall.
  3. Working with a skilled California short sale investor or negotiator. While this may sound bizarre or contradictory, this approach makes a lot of sense, especially if affordability is an issue. Sometimes, the likelihood that a homeowner is giving up will cause them to make their best and final loan mod offer, because they often conclude that a short sale will result in considerably higher losses than loan modification. While this strategy can be used up front, it’s most often used when the borrower is stretched too far financially and unable to get a sensible loan modification. 

Loan Modification Eligibility

Formally, there is no eligibility requirement for securing a loan modification in San Diego, CA. However, the lender and borrower need to come to an agreement on the change to the loan.
 
In some circumstances, a San Diego lender will be more likely to approve a loan modification and others in which the lender is less apt to give approval.  
Typically, loan mod approval will be granted when:
  1. The homeowner has a financial difficulty that has been rectified or will be soon.
  2. The indefinite approval of a loan modification is demanded to make the non-performing loan transform into a permanently performing loan once again.
A “trial” loan modification will be allowed in nearly all cases. To be part of a trial loan modification in San Diego, lenders generally require the homeowner to make monthly payments at fixed amount for a minimum of three months before awarding permanent approval. Because the lender might never issue permanent approval of the loan modification, this can create a trap for homeowners.  
 
A loan mod will often be denied or not approved when:
  1. The lender confirms that the borrower cannot afford the home.
  2. The lender thinks that a borrower's hardship will not be solved through loan modification.
  3. The lender determines that the borrower might continue to pay for the loan even if permanent approval is not provided. For instance, if the bank believes that borrower wishes to keep the home at any cost, the lender has no reason to provide permanent approval.

Most Loan Mods are Destined to Fail

In general, loan modification payments are 64% of pre-tax income, according to the Fitch Bank Rating Agency; however, lenders generally will not award a new loan if the payments are more than 35% of pre-tax income. The lenders’ reasoning is that in order for a loan to be successful and to avoid becoming a non-performing loan, homeowners must set aside a reasonable portion of their wages for other household costs.
 
Because of this incredibly high payment requirement, loan modification is an unfeasible program destined to fail, according to Fitch and others. In its evaluation, Fitch has criticized the banks’ management of loan modifications, due to the low approval rate of indefinite loan modifications and the high rate of failure following permanent approval.
 
Disappointingly, banks have not been forced to assist homeowners in preventing foreclosure, due to the inability of federal and state laws and government regulations to pressure banks into assuming more of the monetary losses that have resulted from the housing crisis.

Is Loan Modification Right for You?

With the significant drop in housing values, loan modifications are not cost-effective solutions for the vast majority of San Diego homeowners. If you are concerned with lowering your debts and expenses, a short sale can markedly reduce your debt and also maximize personal net worth.
 
In addition, if you desire a loan mod in San Diego, CA, yet posses little or no equity, a short sale is a tactic you can use 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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Reader Comments (1)

Thank you for this guide to loan modification for properties in San Diego, California. It is very informative.
Carrie
California Hotels

August 7, 2011 | Unregistered CommenterCarrie

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