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Dec312010

Loan Modification in San Jose, CA: A Guide

Home values in San Jose, CA, have declined significantly over the past several years. This has placed many homeowners in an unworkable situation: they cannot afford their monthly loan payment and selling the home is not a solution because its value is less than the mortgage.
 
If you’re in this situation, you may have considered loan modification. While loan mod is a viable solution for some homeowners, a short sale is often the superior option for reducing debt and growing personal net worth. Home Sales and Loan Modification in San Jose, CAHome Sales and Loan Modification in San Jose, CA
 
In this guide, I’ll explain loan mod in San Jose, CA, debunk some typical myths and help you decide if short sale is the better choice for you. 

What is Loan Modification?

In a loan mod, there is a structuring of the terms of the note. This can include lowering the loan’s interest rate or extending the term (number of payments) to hopefully decrease the homeowner’s monthly payments.  
 
While most San Jose, CA, lenders are willing to lengthen the loan to 40 years, be aware that most interest rate decreases are only temporary. When the economy eventually improves, it will permit the lender to bring the payments back up to the previously higher rate.

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

There are countless myths about loan mod. In this section, I’ll expose three of the most common myths.
  • 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. 
Based on the realities of loan mod, short sale is often a superior option for San Jose, CA, homeowners hoping to free themselves from debt and increase personal net worth.

Quick Tip

Loan modification is not identical to a forbearance agreement. Forbearance agreements include a structuring of the back payments owed with no changes made to the original terms and conditions of the loan. As a result, payments will rise with forbearance agreements since the back payments are being paid off over time.  

How to Pursue a Loan Modification in San Jose, CA, CA

The most common approaches for pursuing a loan modification in San Jose, CA include:
  1. 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.
  2. 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.
  3. 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

Obtaining a loan mod in San Jose, CA, doesn’t require meeting any official eligibility requirements, although the lender and borrower have to reach an agreement on the change to the loan.
  
There are some conditions in which a San Jose, CA, lender will be financially motivated to consent to a loan modification and others in which the lender not likely to grant approval.  
 
Typically, loan modification is more likely to be permitted when:
  1. The homeowner had a temporary hardship or has a difficulty that will soon be resolved.
  2. A permanent loan mod is absolutely mandatory to make the non-performing loan develop into a permanently performing loan once again.
Approval of a “trial” loan modification will be allowed in nearly all cases. To participate in a trial loan mod in San Jose, CA, lenders usually require the borrower to make monthly payments a pre-determined amount for a minimum of three months prior to granting permanent approval. Regrettably, this causes a trap for many borrowers since the lender might never award permanent approval of the loan modification.  
 
It’s likely that loan modification will be denied or not permanently granted when:
  1. The bank determines that the borrower can’t pay for the property.
  2. The lender disagrees that a borrower's difficulty is resolvable by loan mod.
  3. 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.

Most Loan Mods are Destined to Fail

According to the Fitch Bank Rating Agency, the average loan modification payment is 64% of pre-tax income. However, lenders generally will not consent to a new loan if the payments surpass 35% of pre-tax income because they understand that for a to flourish and avoid becoming a non-performing loan, borrowers must keep a reasonable portion of their income to pay for other household necessities.
 
This tremendously high payment requirement causes loan modification to be an unworkable program destined to fail, according to Fitch and others. In its assessment, Fitch has found fault with the banks’ handling of loan modifications, because of the low approval rate of permanent loan mods and the high failure rate of after permanent loan mod approval is granted.
 
Regrettably, federal and state legislature and government regulations haven’t been able to force banks to do more to aid homeowners in preventing foreclosure. This is due to their inability to force banks to absorb more of the monetary losses that have stemmed from the housing crisis.

Is Loan Modification Right for You?

In view of the significant drop in housing values, loan mods are not economically sensible for the vast majority of San Jose, CA, homeowners. If you are interested in reducing your debts and expenses, a short sale can significantly reduce your debt and boost personal net worth at the same time.
 
Additionally, if you wish for a loan modification in San Jose, CA, yet have little or no equity, a short sale can a good approach to convince your bank 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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