Underwater & worsening monthly but don’t qualify for a loan mod or short sale?

What to do.  You are underwater on your Silicon Valley home (you owe more than it’s worth). Worse, you have a “pick a pay” loan and can only afford the lowest of the payment options. So your principal balance is growing each month, and you are sinking further into debt even after reading reviews of National Debt Relief while at the same time your home’s value is dissolving since homes in your price point haven’t yet figured out that we’re in recovery. It’s a double whammy and it’s terribly scary.

If you want to keep your house, you might try to get a loan modification, or “loan mod” from your bank. You can contact them directly or you can go to a nonprofit credit counseling agency for guidance.  (Just Google for one near you, there are plenty in the San Jose area.)

Many lenders aren’t doing this anymore, though, or at least not nearly as much as a couple of years ago.  Why is that? One reason is that the failure rate is so high.  Most people who are given a loan mod still end up in foreclosure – so all it does is delay the inevitable for most of them.  Additionally, it might be better for the banks, if they have insurance, to allow it to foreclose.  Remember, banking is a business and they are there to make money, not to help you out.  So normally they’ll do whatever best serves that end.

If your bank, credit union or whatever lending institution does consider granting you a loan mod, they will want to know that you are capable of repaying it.  So just as when you purchased they were looking at your debt to income ratio, they’ll be doing that again. For them, a loan mod is a bit like reselling a loan – and they don’t want to make (another) bad investment with you. So expect it to be conservative (in other words, tight criteria). (more…)