What is a Loan Modification ?
Loan Modification Definition: A Loan Modification is a negotiated legal alteration of the terms and conditions of your existing mortgage loan, in order to obtain lower mortgage payments or reduce the loan balance, or both. In today’s declining real estate market in California, refinancing is available to only a select few. Getting approved for a traditional refinance is extremely difficult.
The goal of a loan modification is to change the amount of payment to a level where the borrower can consistently make their mortgage payment as well as pay other bills.
Why Would a Homeowner want a Loan Modification ? The need for a Loan Modification (sometimes called a Loan Mod) is usually caused by a borrowers inability to make payments in the agreed upon time-frame or because the property is worth less than the borrower owes. If the Homeowner has a little bit of equity in the home or is slightly upside down on the mortgage, and if the Homeowners current income is about 5% greater then their total current expenses, then one should consider a Loan Modification.
On the other hand, if the Homeowner is upside down on the mortgage by 10% or more, or if the Homeowners income is 10% less then their current expenses, then they should seriously consider a Short Sale.
Why Would a Banks Accept a Loan Modification ? Mortgage Banks would much rather settle for a Loan Modification then foreclose and take your home back. On average, Banks stand to lose over 50% if they foreclose, and therefore would rather collect lower payments then none at all. Banks do not want a mortgage to consume an entire monthly budget. They will take the homeowners entire budget into consideration ie; car payments, cell phone, utilities, credit cards payments, etc.
Who Typically Qualifies for a Loan Modification? There are 3 basic criteria that most Mortgage Banks consider for the approval of a loan Modification. 1.) The Homeowner should have very little or No equity in their home. 2.) The Homeowner is expected to have a Total Income approximately equal too, or no more than 10% of the Homeowner total Expenses. 3.) The Homeowner’s liquid Savings should be no more then about 8 mortgage payments.
What is a Short Sale ? Short Sale Definition: Simply put, a Short Sale occurs when a homes market value is less then the outstanding mortgage debt plus sales costs (sometimes called an “upside down Mortgage”). In order for a Short Sale to actually close, the mortgage bank(s) must agree to write-off a portion of the outstanding loan debt.
Short Sale Example: For example, if a home is currently worth, and sells for $600,000 with $20,000 in total sales costs, and the total outstanding loan balance is $670,000, then the lender(s) would have to agree to reduce the mortgage loan debt by $90,000 in order to allow the short sale escrow to close. At the close of all of our Short Sale transactions, the homeowner is debt free and incurs no cost of sales, for we insure the fee’s and expenses are paid by the bank.
Why Would a Mortgage Bank Consider a Short Sale ? Lenders often entertain such an option for in the long run, they will usually receive a higher percentage of their principal back as compared to forcing the property into Foreclosure. In a Foreclosure, the Mortgage Bank runs the risk of property neglect or damage, and additional delays and costs, and other market losses.
Today, most California lenders won’t commit to a Short Sale until there is a valid and firm purchase offer in hand from a qualified new buyer, and a knowledgeable broker/agent who can negotiate the deal. It’s imperative to work with an experienced real estate broker for they will need to prepare a professional and complete Short Sale package.
How is a Short Sale Negotiated with a Mortgage Bank: Short Sales are one of the most difficult and complicated residential transactions. Compared to a normal sale, these transactions require additional paperwork, intricate negotiations with the mortgage banker(s), and careful preparation of the process and purchase offer. A Short Sale package typically includes: a purchase offer contract, buyers loan qualifications, a realistic and detailed analysis of the fair market value of the home, current local real estate market conditions, seller financial information, seller hardship letter and more.
Basically, the Short Sale real estate professional must demonstrate to the mortgage bank(s) that the home is upside down, the purchase offer is fair and just, and the homeowner has a financial hardship worthy of a short sale. This financial hardship can be due to job layoffs, illnesses, divorce, or even the unexpected large increase in mortgage payments due to interest rate resets.
What’s Causing the high volume of Short Sales in the Southern California Real Estate Market ? Today, the “upside down Mortgages” in California are due mostly to the risky, highly leveraged loans that were extensively used over the past 7 years to purchase homes with little or nothing down. Worse yet, many of these loans were adjustable rate loans, or negative amortization loans in which the loan balance gets higher every month.
In addition, southern California home prices have decreased by as much as 35% to 45% in some areas. These factors are causing many home owners to consider a Short Sale to solve their financial crisis. The result is, there are 1,000’s upon 1,000’s of southern California homeowners who are upside down on their mortgage loan by then of thousands of dollars, and can no longer afford their mortgage payment.