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Dec312010

Loan Modification in Santa Rosa, CA: A Guide

Over the past several years, home values in Santa Rosa, Calif., have declined dramatically. This has put many homeowners in an unimaginable situation: their monthly loan payment is not affordable and selling the home is not a solution because its value is lower than the mortgage.
 
If you’re in this situation, you may have thought about a loan modification. While loan mod is a feasible option for some homeowners, a short sale is usually the best way for lower debt and increase personal net worth.Home Sales and Loan Modification in Santa Rosa, CA
 
In this guide, I’ll explain loan mod in Santa Rosa, shed light on some common myths and help you decide if short sale is the better option for you. 

What is Loan Modification?

In a loan mod, the terms of the note are restructured. This can include a reduction to the loan’s interest rate or an extension of the term (number of payments) to hopefully lower the homeowner’s monthly payments.  
 
Thought the majority of Santa Rosa lenders are willing to extend the loan to 40 years, be conscious of the fact that most interest rate reductions are only short-term. The thought process behind this is that the economy will eventually recover, permitting the lender to later continue the payments at the previously higher rate.

Myths and Realities of Loan Modification in Santa Rosa, Calif.

There are numerous myths about loan mod. In this section, I’ll go through three of the most common myths.
  • Myth: Loan modification will provide forgiveness of accumulated penalties, fees and interest on any missed payments. 
  • Reality: Lenders are choosing to add to the loan balance the accrued penalties, fees and interest from the missed payments. 
  • Myth: Payments are reduced with a loan modification.
  • Reality: In a majority of California loan modification cases, payments increase because the built up penalties, fees and interest are added to the loan balance. To make it seem as though the restructured loan payments are advantageous, lenders are extending the loan term to 40 years and offering minor reductions in the interest rate for two to five years. In more than 30 percent of cases, payments will rise following the loan modification, according to the Fitch Bank Rating Agency.
  • Myth: In a loan mod, the principal balance will go down.
  • Reality: Reductions to the principal balance come about only in rare situations, such as when complex legal or financial subjects are being negotiated or litigated with the lender. 
When the realities of loan modification are examined, short sale often emerges as the best option for Santa Rosa homeowners looking to release themselves from debt and increase personal net worth.

Quick Tip

Loan modification is not the same as a forbearance agreement. In these agreements there is a restructuring of the back payments owed; however, the original terms and conditions of the loan remain unchanged. As a result, payments increase with forbearance agreements because the back payments are being paid off over time.  

How to Pursue a Loan Modification in Santa Rosa, CA

Some commonly used methods for pursuing a loan mod in Santa Rosa include:
  1. Applying directly with the bank. This is the method favored by the bank since most homeowners are unable to negotiate considerable reductions to the interest rate and debt.
  2. Working with a Santa Rosa loan mod company. These companies are usually attorney- or real estate broker-owned, are very experienced and occasionally have success in addressing legal affairs in order to obtain favorable interest rates and reductions in debt. Regardless, it should be noted that the failure rate in this industry is high overall for most homeowners.
  3. Working with an accomplished California short sale investor or negotiator. While this may sound strange or contradictory, this tactic is actually very sound, particularly if affordability is an issue. Because lenders often conclude that a short sale will yield greater losses than loan modification, the mere possibility that a homeowner is giving up may cause them to make their best and final loan mod offer. This strategy can be used immediately, but is most often employed when the borrower is no longer able to make ends meet and is not able to get a satisfactory loan modification. 

Loan Modification Eligibility

There are no eligibility requirements for securing a loan modification in Santa Rosa, CA, although the lender and homeowner must be able to arrive at an agreement on the modification to the loan.
 
There are some conditions in which a Santa Rosa lender will be financially driven to grant a loan modification and others in which the lender will likely not grant approval.  
 
Generally, loan modification is more likely to be accepted when:
  1. 1. The homeowner has a hardship that has been settled or will be settled soon.
  2. 2. A permanent loan mod is a must to make the non-performing loan become a permanently healthy loan once again.
A “trial” loan modification will be allowed in nearly all cases. To take part in a trial loan modification in Santa Rosa, lenders generally call for the borrower to make monthly payments at a pre-decided amount for at least three months before granting permanent approval. Unfortunately, this situation creates a trap for many homeowners given that the lender might not provide permanent approval of the loan mod.  
Loan modification is likely to be turned down or not permanently approved when:
  1. The lender establishes that the borrower can’t afford the property.
  2. The lender disagrees that a borrower's financial difficulty is resolvable by loan mod.
  3. The lender determines that the borrower might continue to make payments even if permanent approval isn’t granted. For instance, if the lender believes that the owner wants to keep the home “no matter what,” the lender has little incentive to provide permanent approval.

Most Loan Mods are Destined to Fail

While the typical loan modification payment is 64% of pre-tax income, according to the Fitch Bank Rating Agency, in general, lenders will not award a new loan if the payments are more than 35% of pre-tax income. The reason behind this is that the banks understand that for a loan stay healthy and avoid becoming a non-performing loan, borrowers must reserve a reasonable portion of their wages for other household items.
 
According to Fitch and others, this tremendously high payment requirement makes loan modification a nonviable program destined to fail. In its assessment, Fitch has judged the banks’ handling of loan modifications, on account of the low approval rate of permanent loan mods, plus the high failure rate of loan modifications after permanent approval.
 
Sadly, federal and state laws and government regulations have been incapable of forcing banks to do more to help homeowners avert foreclosure, due to their inability to force banks into absorbing more of the monetary losses that have come about from the housing crisis.

Is Loan Modification Right for You?

Considering the drastic drop in housing values, loan mods are not a good decision for the vast majority of Santa Rosa homeowners. If you are concerned with lowering your debts and expenses, a short sale can significantly reduce your debt and increase personal net worth simultaneously.
 
Additionally, if you want a loan mod in Santa Rosa, CA, yet have little or no equity, a short sale can help you encourage 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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