You spent weeks—or maybe months—sending documents to your mortgage company.
Bank statements. Pay stubs. Tax returns. Hardship letters. Updated bank statements because the first ones were suddenly too old. Maybe you submitted some of the same documents more than once.
Then the letter arrives:
Your loan modification has been denied.
Now what?
First, don't assume a denial means you are out of options. It does mean it's time to understand exactly where you stand and make some decisions quickly—especially if you are already behind on your mortgage.
Why Was Your Loan Modification Denied?
Start with the denial letter.
Your mortgage servicer should tell you why you were denied, although the explanation may not always be as clear as you would like.
Some common reasons a homeowner may be denied for a loan modification include:
- The servicer determined that your income was insufficient for the available modification program.
- Your income was considered too high or the numbers did not meet the program guidelines.
- Required documents were missing or considered incomplete.
- The servicer could not verify income or other information.
- You did not meet the requirements of the particular modification program.
- The property, loan type or investor guidelines limited the available options.
- The servicer determined another loss-mitigation option was more appropriate.
Don't guess about the reason.
Read the denial carefully and find out whether you have the right to appeal or submit additional information.
Can You Appeal a Loan Modification Denial?
Possibly.
Your denial notice may explain whether an appeal or review is available and the deadline for requesting it. The options can depend on the loan, servicer, timing and circumstances.
If you believe the servicer used incorrect income, overlooked documents or based the decision on inaccurate information, pay particular attention to any appeal rights and deadlines in the notice.
This is also a good time to organize everything you submitted.
Keep copies of your application, correspondence, financial documents, denial notice and notes from conversations with your mortgage company.
Should You Apply for Another Loan Modification?
Sometimes homeowners immediately want to start over and submit another application.
That may make sense if something important has changed.
Perhaps your income increased. A temporary hardship ended. You obtained new employment. Household finances changed. Or the previous application contained incomplete or inaccurate information.
But repeatedly applying without understanding why the previous modification failed can consume valuable time while the delinquency continues.
Before starting again, ask:
What would be different about the next application?
If the answer is “nothing,” it may be time to evaluate other options too.
What Happens to the Missed Mortgage Payments?
A loan modification application generally doesn't make the existing delinquency disappear.
If you were already several months behind, those missed payments still have to be addressed somehow unless an approved loss-mitigation solution changes how they are handled.
That is one reason homeowners can feel blindsided after a denial. They may have spent months working through the modification process while the underlying mortgage problem continued getting larger.
Find out exactly:
- How much you currently owe.
- How many payments you are behind.
- Whether foreclosure activity has begun.
- Whether a Notice of Default has been recorded.
- What deadlines are approaching.
The answers matter.
If Your Loan Modification Was Denied, Can the Lender Foreclose?
A loan modification denial does not automatically mean your house will be sold tomorrow.
But if your mortgage is delinquent, foreclosure may continue or resume subject to applicable servicing and foreclosure rules.
California foreclosure has specific notices and timelines. Your position is very different if you recently missed a payment than if a Notice of Default has already been recorded or a trustee's sale is approaching.
Do not assume that continuing to talk with the mortgage company means every foreclosure deadline has stopped.
Know where you are in the process.
Can You Sell Your House After a Loan Modification Denial?
Yes.
A denied loan modification does not prevent you from selling your home.
If the property's market value is greater than the amount necessary to pay the mortgage and other selling obligations, you may be able to sell conventionally and preserve your remaining equity.
The important question becomes:
What would you actually walk away with if you sold?
That requires looking at the property's likely selling price, mortgage payoff, other liens and estimated costs of sale.
And don't assume you have no equity simply because you are behind on the mortgage. Depending on how long you have owned the property and what has happened to its value, you may have more options than you think.
What If You Owe More Than the Home Can Sell For?
Then a short sale may be one of the options worth investigating.
In a short sale, the mortgage servicer is asked to approve a sale in which the proceeds will not be sufficient to pay the mortgage obligation in full.
Approval is not automatic. The process can involve financial documentation, property valuation, purchase-contract review and negotiations with the mortgage servicer and potentially other lienholders.
But a failed loan modification does not automatically prevent you from pursuing a short sale.
In fact, I have worked with many homeowners who came to me after attempting a loan modification first.
They weren't necessarily trying to sell when their financial problem began. They were trying to keep their homes.
The situation changed when keeping the home no longer worked.
What If You Received a Loan Modification Before and Fell Behind Again?
This is another situation I see.
Maybe a previous modification solved the problem temporarily, but the payment later became unaffordable again. Perhaps your income changed, expenses increased or the terms of the modified loan changed over time.
A previous loan modification does not mean you should automatically assume another modification will—or won't—work.
Look at your situation as it exists today.
Can you realistically afford the home going forward?
That's a different question from whether you can somehow get the delinquent loan current again.
Should You Keep Trying to Save the Home or Consider Selling?
There isn't one answer for every homeowner.
Start with a few practical questions:
Can I afford the mortgage payment going forward?
If the loan were brought current or modified, would the home still fit my budget?
How much equity do I have?
How far along am I in the foreclosure process?
What happens financially if I sell now?
What happens if I wait another three or six months?
Sometimes keeping the home makes sense.
Sometimes selling while there is still time and equity gives the homeowner substantially more control over what happens next.
And sometimes the numbers indicate that a short sale or another foreclosure alternative deserves consideration.
The important thing is to evaluate those choices while you still have choices.
Don't Let a Denial Letter Become a Decision by Default
Receiving a loan modification denial can feel like the mortgage company just made the decision for you.
It didn't.
The denial tells you that one particular attempt to resolve the mortgage problem was unsuccessful.
Now you need to determine what options remain.
That may mean appealing the decision, pursuing another loss-mitigation option, selling the property, investigating a short sale or obtaining legal or housing-counseling advice appropriate to your situation.
What you don't want to do is put the denial letter in a drawer and wait.
Time matters once a mortgage is delinquent.
Loan Modification Denied in Orange County or Southern California?
I have been a California real estate broker for more than 26 years and have worked with homeowners facing difficult mortgage and selling situations, including short sales and homeowners whose loan modification efforts were unsuccessful.
If your loan modification has been denied and you're considering selling, I can help you look at the real estate side of your options—including the property's likely value, estimated equity and whether a traditional sale or short sale may be possible.
There is no need to decide that you are selling before you understand the numbers.
Start by finding out where you stand.
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This information is for general educational purposes and is not legal, tax or financial advice. Foreclosure and loss-mitigation situations can involve important deadlines and individual circumstances. Consider consulting an appropriate attorney, HUD-approved housing counselor, tax professional or other qualified adviser when needed.
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