What is Loan Modification?
Myths and Realities of Loan Modification in San Jose, Calif.
- Myth: In loan modification, there is forgiveness of built up penalties, fees and interest on any missed payments.
- Reality: Lenders are electing to include the accrued penalties, fees and interest from the missed payments with the loan balance.
- Myth: Payments will lower with a loan modification.
- Reality: Payments increase in a very large percentage of California loan mod cases, because the accrued penalties, fees and interest on missed payments are added to the loan balance. To make the restructured loan payments seem beneficial, lenders are stretching out the loan term to 40 years and may offer slight decreases in the interest rate for two to five years. However, in over one third of cases, loan modification payments will be higher than prior to the loan modification, according to the Fitch Bank Rating Agency.
- Myth: The principal balance will go down with a loan modification.
- Reality: Deductions in the principal balance occur only in extraordinary situations. These reductions are most apt to occur when complex legal or financial matters are being negotiated or litigated with the bank.
How to Pursue a Loan Modification in San Jose, CA, CA
- Applying directly with the bank. The lender prefers this approach because most homeowners aren’t able to negotiate significant reductions to the interest rate and debt.
- Working with a San Jose, CA loan modification company, which is usually attorney- or real estate broker-owned. Loan mod companies are highly skilled and occasionally have success in addressing legal situations in order to obtain satisfactory interest rates and debt reductions. However, please note that the success rate in this industry is low for most homeowners.
- Working with a trained California short sale investor or negotiator. While this may sound odd or contrary, this is actually a very sound method, especially if affordability is an issue. Since lenders often determine that a short sale will create greater losses than loan mod, the mere prospect that a homeowner is throwing in the towel may cause them to make their best and final loan modification proposal. This strategy can be used at the outset, but is most often used when the homeowner is stretched to the limits financially and is not able to get a satisfactory loan modification.
Loan Modification Eligibility
- The homeowner had a temporary hardship or has a difficulty that will soon be resolved.
- A permanent loan mod is absolutely mandatory to make the non-performing loan develop into a permanently performing loan once again.
- The bank determines that the borrower can’t pay for the property.
- The lender disagrees that a borrower's difficulty is resolvable by loan mod.
- The lender decides that the borrower might continue to pay for the loan, even if the lender denies permanent approval. For example, if the lender is convinced that the borrower wants to remain in the property “no matter what,” the lender will lack the motivation to provide permanent approval.