What Happens if Loan Modification Was Denied?
Loan modifications are adjustments to payments that allow borrowers who have experienced hardship to remain in their homes and continue making payments, even if the payments are not as high as the original agreement. Loan modifications are given out by lenders as a way of avoiding the costly, messy foreclosure process. They also help borrowers remain in homes.
Why do Lenders Give Out Loan Modifications?
Before understanding why your modification was denied, let’s review why lenders would approve a loan modification in the first place. Loan modifications allow lenders to still collect on the mortgage, which they really want to do. The foreclosure process is complex, long, and time consuming. And lenders don’t always recover the amount of money in the timeline that they expected to recover it. So lenders really do want to avoid foreclosure in most cases.
If a borrower is unable to make good on the original terms of the mortgage, the lender then has the opportunity to modify the loan to help the borrower make good. However, loan modifications are a way for the lender to collect on the original loan amount and avoid foreclosure. If the borrower has lost all their income, or seems unlikely to make payments at all, then the lender will probably not approve them for a modification. There’s no reason to approve a modification if you’re going to have to run through the foreclosure process later on anyway.
Reasons Why A Modification Could be Denied
In California, a law called the “Homeowner Bill of Rights” (HBOR) generally gives borrowers the right to appeal a modification denial.
Under HBOR, in most cases, if the borrower’s application for a first lien loan modification is denied, the borrower gets at least 30 days from the date of the written denial to appeal and to provide evidence that the mortgage servicer’s determination was in error. Though, some smaller loan servicers don’t have to give you a chance to appeal the decision. (Cal.Civ.Code § 2923.6).
So, you should submit your appeal to your servicer within 30 days from the date given in the denial letter. In your appeal, you’ll need to provide evidence that the servicer made a mistake when denying your application.
Does Not Meet Loan to Value Requirements
Modifications could be denied for income that is not sufficient, a poor loan to value ratio, or missing information on the modification.
Shockingly, the most common reason that loan modification requests are denied is because the application was not actually complete. You may have left out a single signature or a bank statement, which can set you back months. It’s vital that you fill out everything right the first time!
Failure to Meet Income Standards
Even if you experience a real and complete hardship, you won’t get a loan modification if you can’t meet certain income standards. If you lose your job completely and it doesn’t look like you’ll find another for the same income amount, you could be denied for modification. If you have to get work that pays significantly less, you may not even meet modified payment amounts.
Failure to Meet Hardship Standards
If your lender thinks that you can meet your current monthly payment, then you’re not going to be able to get a loan modification. You must experience a real hardship that prevents you from making your old payments on time. Additionally, you must show that you’ve defaulted on the loan (or are about to default on the loan) for a sufficiently good reason. Job losses and medical emergencies count as hardship.
Information Your Servicer Must Give You in the Denial Notice
Requirements under the Home Owner Bill of Rights (HBOR) state that if your servicer denies your modification application, the servicer must:
- Explain your right to appeal, including giving you the amount of time you have to file an appeal
- Give you the specific reason for the denial. (This only applies if the investor (the owner of your loan) is the one that denied your request.)
- Provide you with the monthly gross income and property value that the servicer used to calculate the net present value (NPV). (This only applies if they denied your application because of an NPV calculation.)
- In some cases, they must show that you were previously offered a first lien loan modification and failed to successfully make the payments under the agreed terms of the modified loan.
- They must also describe any foreclosure alternatives that are still available to you (short sale, deed in lieu, etc), and the steps you must take to be considered for those options. If you have already been approved for another foreclosure prevention alternative, they must provide you with the information necessary to complete the alternative foreclosure prevention option.
Appeal If Loan Modification Was Denied
Federal law generally requires servicers to give homeowners 14 days to appeal a loan modification denial. In most cases, this appeal right kicks in if the servicer receives your loan application 90 days or more before the foreclosure sale date. If a complete loss mitigation application is received less than 90 days before a foreclosure sale but more than 37 days before a foreclosure sale, the servicer must give you at least seven days to accept or reject a loss mitigation offer.
Instead of reapplying, you can always appeal the denial that you were given.
Lenders usually have appeal procedures that you can attempt in writing. You should appeal instead of reapplying if you think that (1) you can really improve your situation to apply for loan modification and (2) something about your application wasn’t treated fairly. Usually, appeals don’t work, but it’s definitely worth a shot.
Even if the appeal doesn’t go through, you can always reapply for a loan modification after making some material changes to your financial situation.
Reapply for the Loan Modification
Your letter from your lender should explain why your modification was denied. Use this letter as an encouragement to reapply for the modification, but fix the reason you were denied. Once you’ve fixed the reason you were explicitly denied for, try to set up a meeting at the office of the lender. You can explain to them the problems you’re having with the loan, and the steps you took to get your finances into better shape for the modification.
When you reapply and meet with your lender, ask if there are any other kinds of modifications that you can get.
Find a Cosigner for the Modification
If you have any way of getting a cosigner for the loan modification you’re seeking, that can drastically help your ability to make payments. Cosigners are on the hook for any payments that you’ve missed, and this validation can help you get modifications that you’d never be able to get under your own power.
Trial Modification Payments
Many lenders will approve a temporary modification as a trial period to see whether or not you’ll be able to make the modification payments on your loan. If you miss one of the trial modification payments, the loan modification will not be permanent and it will be back to the regular loan. But you might be able to convince a lender to redo the trial modification period.
Options If A Loan Modification Was Denied
If you have decided not to appeal the loan modification denial, you still have other options. You can:
- File bankruptcy
- If you have equity in your home, sell your home, and receive funds from an equity sale.
- If your home is underwater, complete a short sale.
- Complete a Deed in Lieu of Foreclosure. This process deeds the home back to the bank in exchange for avoiding foreclosure.
- Make up (Reinstate) the number of payments you missed and resume making your regular payments prior to the foreclosure sale date.
- Use state-specific protections available to you based on your foreclosure timeline to buy as much time as possible and then sell the home right before foreclosure.
- Do nothing and let the home go to foreclosure. (This is the worst thing you can do.)
Loan Modification Denied Frequently Asked Questions FAQ
Why was my loan modification application denied?
There are many reasons why a loan modification application may be denied. Some common reasons include:
-The borrower failed to provide all of the required documentation.
-The borrower’s income was not sufficient to support the modified payment amount.
-The borrower had already missed too many payments before applying for the modification.
-The property value had declined, making it worth less than the outstanding loan balance.
If you have been denied for a loan modification, it is important to find out why so that you can take steps to improve your chances of being approved in the future.
What are the requirements for a successful loan modification?
How can I appeal the decision to deny my loan modification?
What are the consequences of not being able to modify my loan?
Are there any other options available to me if my loan modification is denied?
Loan Modification Specialists
The first step is to consult a loan modification specialist. We are always happy to answer all of your questions and there is never any obligation to have a conversation with us.
Our team does not charge any fees and we offer discrete consultations over the phone, at your office, or in your home. We also have excellent recommendations for an attorney, tax professionals, and/or any other referral you may need.
Contact us today at 619-777-6716 or submit your information on our contact form and we will be in touch to discuss your options and determine how we can help you.