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
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.
Reapplying for Loan Modification
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.
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.
Reapply for the Loan Modification
Your letter from your lender should explain why your modification was denied. Use this letter as 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.