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Dec312010

Loan Modification in San Diego County, CA: A Guide

In San Diego County, Calif., home values have plummeted dramatically over the past several years. This has placed numerous homeowners in a tricky situation: their monthly loan payment is overly high and selling the home is not a good choice because its value is less than the mortgage.
 
If you’ve reached this point, you may have considered loan modification. While loan mod is a possible option for some homeowners, a short sale is usually the best solution for reducing debt and boosting personal net worth. Home Sales and Loan Modification in San Diego County, CAHome Sales and Loan Modification in San Diego County, CA
In this guide, I’ll give an explanation of loan modification in San Diego County, debunk some common myths and assist you in deciding if short sale is the better choice for your situation. 

What is Loan Modification?

With a loan modification, the terms of the note are restructured. This can include lowering the loan’s interest rate or stretching out the term (number of payments) to hopefully decrease the homeowner’s monthly payments.  
 
While most San Diego County lenders are willing to stretch the loan to 40 years, be aware that most interest rate cuts are only temporary. The reasoning behind this is that the economy will improve in the future, permitting the lender to boost up the payments to the previously higher rate.

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

There are various myths about loan modification. In this section, I’ll throw light on three of the most common myths.
  • Myth: Forgiveness of accrued penalties, fees and interest on any missed payments will be granted in loan mod. 
  • Reality: To the loan balance, lenders are adding the accumulated penalties, fees and interest from the missed payments. 
  • Myth: Payments will decline with a loan mod.
  • Reality: Payments increase in a very large number of California loan modification cases, due to the addition of built up penalties, fees and interest on missed payments. In an effort to make the restructured loan payments seem beneficial, lenders are lengthening the loan term to 40 years and may offer small reductions in the interest rate for two to five years. However, in more than 30% of loan mod cases, payments will be higher than prior to the loan modification, according to the Fitch Bank Rating Agency.
  • Myth: The principal balance will drop in a loan modification.
  • Reality: Decreases to the principal balance occur only in exceptional situations. These reductions are most likely to come about when complicated legal or financial issues are being negotiated or litigated with the bank. 
With the realities of loan modification in mind, short sale is usually a better option for San Diego County homeowners looking to ride themselves of debt and gain personal net worth.

Quick Tip

Loan mod and forbearance agreements are not one in the same. In a forbearance agreement, the back payments owed are restructured without changing the original terms and conditions of the loan, resulting in a higher payment since the back payments are being paid off over time. 

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

A few common methods for going after a loan modification in San Diego County include:
  1. Applying directly with the bank. This is the strategy preferred by the lender since most homeowners aren’t able to negotiate sizeable reductions to the interest rate and debt.
  2. Collaborate with a San Diego County loan mod company. These companies are most often attorney- or real estate broker-owned, are very talented and sometimes have success in tackling legal issues in order to get favorable interest rates and debt reductions. Though, it should be noted that the success rate in this industry is largely unacceptable for most homeowners.
  3. Partnering with a skilled California short sale investor or negotiator. Although this may seem odd or contradictory, this strategy is actually very wise, especially if affordability is a concern. Because lenders often realize that a short sale will create greater losses than loan modification, the likelihood that a homeowner is throwing in the towel may cause them to make their top and final loan modification offer. This tactic can be used initially, but is most often brought into play when the borrower is stretched to the limit financially and powerless to get a satisfactory loan modification. 

Loan Modification Eligibility

No formal eligibility requirement exist for obtaining a loan modification in San Diego County, CA. However, the lender and borrower must agree on the changes to the loan.
 
There are a few circumstances in which a San Diego County lender will be more likely to approve a loan mod and others in which the lender will not be motivated to grant approval.  
 
Overall, loan modification approval increases when:
  1. The borrower has a difficulty that has been resolved or is resolvable soon.
  2. A permanent loan modification is a requirement to make the non-performing loan convert to a permanently performing loan once again. 
In nearly all cases, approval of a “trial” loan mod can be obtained. To be part of a trial loan modification in San Diego County, borrowers are usually required to make monthly payments at a pre-determined amount for at least three months before permanent approval is given. Regrettably, this entraps many borrowers because the lender might not provide permanent consent for the loan mod.
  
Denial of loan modification is likely to occur when:
  1. The lender believes that the borrower cannot afford the payments on the property.
  2. The lender figures that the homeowner might make the loan payments even if the loan mod isn’t permanently approved. For instance, if the lender believes that the borrower desires to keep the home “no matter what,” the lender has zero incentive to provide permanent approval.
  3. The lender opposes the idea that a borrower's hardship can be solved by loan modification.

Most Loan Mods are Destined to Fail

A typical loan modification payment is 64% of pre-tax income, as claimed by the Fitch Bank Rating Agency. Contrastingly, lenders generally will not award a new loan if the payments are more than 35% of pre-tax income because they realize that for a loan to be successful and refrain from becoming a non-performing loan, borrowers must to be able to allocate a sensible portion of their income for other household expenses.
 
This tremendously high payment requirement makes loan mod an impractical program destined to fail, according to Fitch and others. In its evaluation, Fitch has been critical of the banks’ treatment of loan modifications, because of the low approval rate of permanent loan mods and the extortionate failure rate of loan modifications following permanent approval.
 
Sadly, federal and state laws and government regulations have been powerless to force banks to do more to help borrowers prevent foreclosure, because of their inability to pressure banks into taking on more of the monetary losses that are coming about from the housing crisis.

Is Loan Modification Right for You?

Bearing in mind the significant drop in housing values, loan mods are not a smart option for the vast majority of San Diego County homeowners. If you are worried about debt and expense reduction, a short sale can help you achieve those goals, while also increasing personal net worth.
 
Moreover, if you hope for a loan modification in San Diego County, CA, yet have little or zero equity, a short sale can be employed as a tactic to get your bank to make an equitable 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 give me a call at 1-888-REHelp9.

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