Receiving a loan modification denial letter feels very scary.
To make matters worse, the denial letters make it hard to understand why you were denied or what you’re supposed to do now that you’re denied.
A loan modification denial doesn’t necessarily mean that the process is over.
The first step to understanding your denial letter is to figure out the reason for your denial. Some reasons for denial are concrete and hard to overcome. Some reasons for denial should be appealed and sometimes, lenders just make a mistake that causes the modification to be denied.
Read this guide on how to appeal a loan modification denial
Here are 8 common reasons why lenders issue loan modification denials:
- You never completed the required loan modification package
- You don’t make enough money to support a loan modification
- You don’t have clear title to your property
- You don’t have a valid financial hardship reason
- You make too much money and have too many assets.
- You have exceeded the number of loan modifications that you’re allowed
- Your investor does not offer loan modifications as a loss mitigation option
- Your Loan to Value (LTV) ratio is too high or too low
- You defaulted too close to the origination date of your mortgage or too close to your last loan modification
Denial Reason #1: Your package was deemed “incomplete.”
This is the most common reason people end up denied for a loan modification.
When you apply for a loan modification, your package first gets reviewed by document processors. In order for your loan modification package to get past the document processors, they have to “deem your file complete.”
Once they do this, they send the package to the underwriters who make a decision on the loan modification.
While this sounds straightforward, it doesn’t always go according to plan. Lenders intentionally make the process hard.
You may have gotten trapped in a never ending cycle of additional document requests.
Some lenders continue to request changes to documents or continue to reject your documents without making it clear why they are being rejected.
Sometimes, the document processors take so long to review your loan modification package that by the time they get to it, the financial documents you submitted (like your bank statements and pay stubs) are outdated.
Then, they get to say that your documents were out of date (even if they were current when you submitted them)
If the issues with your documents do not get resolved, at some point – the lender will issue a denial letter and will close your loss mitigation review.
SOLUTION: You can immediately re-apply for a loan modification if you’ve been denied for having an incomplete package.
If you get denied for having an incomplete package, you can immediately re-apply.
You were not actually evaluated for eligibility for the loan modification. The underwriting department (the department that makes the decision on whether you get a loan modification) did not actually review your file.
If you get denied for this reason, you just failed to complete the documents needed to get your file passed to the decision makers.
So, you can immediately re-open your review by sending in an updated financial package and trying again.
With that said, since it did not go well the first time around, prior to trying again – you may want to consider getting some help so you can avoid the same issue happening to you twice.
Denial Reason #2: Income-based denial
You don’t make enough money to support a loan modification. This is an income-based denial.
Mortgage lenders will only offer modifications if they believe that you can afford resuming a regular payment.
The lender needs to see continuous, stable income coming into the household. The income needs to be enough to allow you to comfortably resume a mortgage payment.
This is why the lender reviews your income. They look at other debt you’re paying on by pulling your credit report and they evaluate the household expenses you reported.
Generally, they’re looking at two things:
Your Front-End Debt to Income Ratio: This is the ratio of your mortgage payment to your total, monthly household income. The general rule is that lenders like to see that your mortgage payment is about 33% (or around this number) of your overall household income. This means that you have enough remaining income coming in each month (after you pay your mortgage) to support your other living expenses. If your mortgage payment takes up 80% of your monthly income, you would likely be denied for your modification because you would not have enough money left over at the end of every month to pay other required expenses.
Your Back-End Debt to Income Ratio: This is the ratio of ALL your monthly household expenses to your total, monthly income. If this number is high (around 55%), you may get denied for a loan modification. At the end of the month, if you have very little funds left over after you pay all your required expenses and your mortgage payment, the bank will view you as someone who does not have enough income to cover unforeseen expenses without defaulting on your mortgage.
So, if the numbers you reported for your expenses are accurate and the bank calculated your income correctly – they may be raising a good point that you should actually think through.
While it may feel like a loan modification is the right option for you – if you can’t comfortably resume making a mortgage payment, you may want to start looking at other options.
With that said, lenders often make mistakes in this area with the calculations they use.
They can calculate income incorrectly, forget to include one (or multiple) sources of income that you reported, or they inflate or miscalculate your expenses.
SOLUTION 1: Ask your lender to tell you the number they used for your monthly income and your monthly expenses.
If they made a mistake OR if circumstances have changed since you initially asked for the loan modification, appeal the loan modification and point out their error(s).
All loan modification denial letters come with an appeal option – meaning, if you believe the bank calculated your income or your expenses incorrectly, you should appeal your denial.
Tell them what you believe the error is and what you believe the correct calculation should be. Attach supporting documents to provide as much proof as you can that your calculation is correct.
If the calculation they used is inaccurate because of a change in circumstances on your part (and not an error), you can still appeal.
Make sure your appeal letter explains the change in circumstances, how the change has impacted your income and then attach supporting documents. Give them an updated number to use for your monthly income.
SOLUTION 2: Re-apply (or appeal) with raised income.
If you received an income-based denial because the bank does not believe you can afford the home and they didn’t make any mistakes (and you still want to keep it), you may choose to try and raise the household income.
Some people choose to take in a renter, raising the household income with rental income. Others choose to take on a second job. Some people have a partner or significant other who wants to participate in the modification process and include their income.
Trying to raise the household income is a personal decision and should likely be discussed with an attorney so you understand the potential impact of adding another’s income but – it is an option that you can try in the event you want to do everything possible to save the home.
If you raise the household income – re-apply for the loan modification from the beginning, with new documents. You re-apply instead of appeal because you want to show the bank proof of the raised income and that usually takes more than the 30-days you have to appeal. If you can raise the income during the appeal period AND have proof that the income was raised, you can address the change in circumstance through the appeal.
SOLUTION 3: Re-apply (or appeal) with reduced expenses.
Reducing expenses can be an option if you were denied for having excessive expenses. If you have large credit card payments that caused you to get denied for a loan modification, paying them off and then re-applying for the modification is an option.
Remember – you can’t just tell the bank that you’ve reduced your expenses. You have to prove that you’ve reduced them either by paying off the outstanding debt or by significantly lowering your outgoing expenses in a verifiable way.
You can verify a reduction in household expenses by showing the bank an updated bank statement showing less money going out.
If you reduce your expenses, re-apply for the loan modification from the beginning, with new documents because it usually takes longer than the appeal period for you to get your expenses lowered in a verifiable way.
Denial Reason #3: You don’t have clear title to your property
Some investors will not offer you a modification if you have other liens attached to your property.
FHA and the VA are the two main investors that are strict about having clear Title to your home as a requirement for a modification.
If you owe other creditors money and they get a judgment against you, they can attach a lien to your home to prevent you from being able to sell (or refinance) your home without paying them their money.
Your mortgage lender will review a Title Report as part of the modification process. If your Title Report shows a lien on Title, you may get denied.
Solution: Handle any outstanding liens prior to applying for your loan modification OR resolve the lien on Title and then re-apply for your modification.
If you get denied because you have a lien on title, and your investor is allowed to deny you because of the lien, you have to resolve the lien before getting the modification.
If you’re able to resolve the lien, re-apply for the modification and send the mortgage lender proof that the lien has been resolved.
Denial Reason #4: No “valid financial hardship” reason
As part of the modification process, you have to prove to your lender that you defaulted on your mortgage as a necessity and not just due to poor financial planning or because you prioritized other, less important expenses.
Your financial hardship should fall into one of the five categories below:
- Job Loss / Reduction in Income
- Medical Issues
- Death of a Borrower
- Divorce or Marital Separation
- Unforeseen Expenses
If you had a hardship that did not mention one of the above five categories, this may be the reason for your denial.
Solution: Appeal the denial and change how you explained your financial hardship to fit one of the 5 valid financial hardship reasons.
The 5 reasons listed above are very broad. Most people who get denied for this reason just mis-stated what their financial hardship was or didn’t explain it clearly enough.
You can appeal the denial by re-stating your hardship as one (or multiple) of the valid hardship reasons listed above. Attach as much supporting documentation as you can to help prove that your hardship is valid.
Denial Reason #5: Affordability Denial
The bank believes you can fully reinstate your mortgage and resume regular mortgage payments without needing a loan modification. This is called an “affordability denial.”
If you’ve been denied for this reason, you have shown the bank so much money both in assets and in a monthly surplus of income that they don’t believe you need a modification.
Whatever you have shown the mortgage lender makes them believe that you have enough funds to fully reinstate your mortgage at one time.
Most commonly, this occurs when people send their bank statements to the lender and the bank statements show more money available than what is needed to reinstate the mortgage.
If this is the case, and you have enough money to complete a reinstatement (and you want to keep the home), you would probably be best served by completing the reinstatement to end the default (since you have the funds).
Then, you would go back to making regular monthly payments. The loan would be brought current and then you would have the option to refinance to get better terms in about 6 months or less.
SOLUTION: Clarify using the appeal process that the income the bank is relying on is not what it looks like.
If you truly do not have the funds available that the bank thinks you have, or if the funds are not able to be easily pulled out of your accounts without penalties (for example 401K income should NOT count as income that should be calculated as income because it is earmarked for future use), you should file an appeal of your denial and further clarify why that income cannot be used for a reinstatement.
Write the reason you believe these funds cannot be used to reinstate your loan in an appeal letter and attach as much supporting documentation as possible.
Denial Reason #6: You have exceeded the number of loan modifications allowed by your investor.
Depending on who the investor is on your loan, the number of modifications you can receive could be capped at a certain number.
For example, if you have a Fannie Mae or Freddie Mac loan, you can only receive 3 modifications over the life of your loan. If you apply for a 4th modification, you will probably be denied.
This is a very difficult denial reason to overcome. Most investors strictly abide by their guidelines regarding the number of modifications you can have – simply asking them to give you one will not work.
Your best bet to overcome this one is to try and use a state-specific process (like Foreclosure Mediation) to get your lender to ask your investor to make an exception for you.
Even with mediation, this can be a difficult denial reason to overcome, so if you know you’ve already had three modifications, you may want to discuss backup options with an attorney should the modification be unavailable to you.
Denial Reason #7: Your investor does not offer loan modifications as a loss mitigation option
Most investors have loan modification programs that you can apply for. The top 5 government-backed investors (Fannie Mae, Freddie Mac, USDA, VA and FHA) all have structured loss mitigation departments and loan modification programs for you to take advantage of.
Many non-government backed investors also have loan modification programs that you can apply for.
But, there are a few private investors that simply do not offer loan modifications. These investors cannot be forced to offer you a loan modification and they may not even have the procedures in place to know how to offer them.
While this is rare, it does happen. If you find yourself facing this reason for denial and you want to keep the home, you should consult with a Chapter 13 bankruptcy attorney as soon as possible, as this may be your only option to keep the home without having to fully reinstate the mortgage all at once.
Denial Reason #8: Your Loan to Value (LTV) ratio does not meet the investor’s guidelines for approval or they “cannot create an affordable payment for you”
Different investors have different loan to value or (LTV) requirements when deciding whether they can approve a loan modification offer.
A loan to value ratio is the ratio of your mortgage in relation to how much your home is worth (or the value of your property).
An example of an LTV calculation is below:
Home value: $200,000
Mortgage balance: $100,000
Your loan to value ration (LTV): 50%
The bank looks at how far behind you are and what an affordable payment would look like for the household. Part of the loan modification process includes deferring your arrears (the amount of missed payments) to the end of the loan.
Sometimes, the loan to value ratio will be too high if they defer the payments you missed to the end of the loan. Most lenders have LTV “cut off points.” For example, some investors allow the LTV ratio to be 115% or less but it cannot exceed 115%, so if – by adding your arrears to the end of the loan, your LTV ratio exceeds 115%, you would be denied for the modification.
If this is the situation you’re facing, you likely need to speak to an attorney. It’s not good to owe money in excess of what your home is worth (which would be the case if your LTV passed 100%). Even if lenders allow this to be the case – it may not be a good idea for you to do because your home would then be underwater.
Sometimes, if the LTV is too low, you will also get denied. If you have a ton of equity in the home and the loan to value ratio is very low, you may also get denied.
So, if you believe you have an LTV issue at play, figure out what your investor’s guidelines say about the LTV ratio and then try to talk to an attorney about the issue.
Denial Reason #9: You defaulted too close to the origination date of your mortgage or too close to your last loan modification
Most investors will deny a loan modification if you default 60-days or less after you’ve taken out your mortgage (or received a loan modification).
This is a difficult denial reason to overcome. Investors are allowed to set limits on how quickly you can default before being offered a loan modification. So if this happened to you, your best bet is going to be to figure out how to cure the default quickly before the amount owed gets too high.
Can the bank deny my loan modification after I finish the Trial Payment Plan (TPP)?
If you receive a TPP in writing and FULLY comply with all the terms of the TPP, they cannot deny you a final loan modification.
The only way you would be denied a final modification following the TPP period is if the bank thinks you did something that did not comply with the TPP agreement.
The TPP period can be tricky though so make sure you set yourself up for success.
Does a bankruptcy automatically cause my loan modification to get denied?
No! You can still work on a loan modification even if you filed bankruptcy.
It is always best to make a plan with your bankruptcy attorney so that you apply for a modification at the best time, but a bankruptcy in and of itself does not cancel a loan modification.
How many times can you appeal a loan modification denial?
One time. Once the bank has reviewed and replied to your appeal – that modification request is closed.
What are my options if my loan modification is denied?
- Appeal your loan modification denial within the 30-day appeal period to try and correct any errors or mistakes you think the lender has made
Read this guide to appealing a loan modification denial
- Re-apply for the loan modification after speaking with a professional in your state who can help you present your information in a way that will help your approval chances
- See if there are any protections or processes in your state that can help you overcome your denial. Washington has the Foreclosure Mediation process that will give you a platform to discuss your denial with your bank under the umbrella of foreclosure protection.
- Sue your bank using the foreclosure litigation process
- File bankruptcy
- Sell your home, receive funds from an equity sale
- Short sell your home if the home is underwater
- Deed the home back to the bank in exchange for avoiding foreclosure (this is called a Deed in Lieu)
- Reinstate the amount of payments you missed and resume 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
If you are a Washington state homeowner and have been denied a loan modification and want to chat about your options, feel free to give me a call at (425) 654-1674.
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