Every day people lose their job, experience illness, run into divorce and some other hardships. These issues can significantly affect your income. When this happens, people can fall behind on their mortgage payments causing a distressed financial situation. Many people then turn to the bank to try and renegotiate their agreement with regards to their mortgage and attempt to do a loan modification before attempting a short sale. The loan modification can work in specific instances and situations, but it’s not the answer for everybody. In fact, it’s common people get their hopes up when they apply and then ultimately get denied. We’re going to look at the most common reasons why your loan modification got denied.
By far the number one reason a bank will deny your loan modification is that you’ve submitted incomplete information. In most cases, Banks feel it’s not in their best interest to do all this additional work to modify an existing contract you’ve already agreed with and signed. Many things can qualify as incomplete information. For example, submitting paperwork without a signature in place or putting a number in the wrong box. This lack of attention to detail is without a doubt a big problem because it eats up so much time leaving you in a dangerous spot further down the line.
In many situations, people are not able to pay the modified payment. Some popular real estate shows cover this problem. In some instances, the math can result in a higher monthly amount. This scenario is definitely where a loan modification does not make sense in your situation. The way the formula works, the bank will take your total gross income and combine it with your spouse. The bank will then try to calculate a rate that’s approximately 31% of your total gross income. When this number mathematically lands close to your current amount or even higher, the bank will deny you. Some banks do waiver from the federal guidelines somewhat, but in most instances, the formulas are very similar.
Another problem for having your loan modification denied depends on the amount of equity in your home. You can have too much equity in your home for a loan modification. This issue can mean the bank feels the amount of equity would cover the cost of foreclosure and all the additional hard costs. Equity is one of the primary variables to look at with loan modifications for your situation. Additionally, the other end of the spectrum is true too. Having no equity in your home puts you in a position that doesn’t make much sense.
Another obstacle is how the bank views your hardship. It’s very common for them to deny a loan modification because the hardship itself does not qualify in the banks perspective. Loan modifications are designed as temporary relief. The burden of proof is on the borrower to prove their difficulty qualifies and is temporary. The clever investor talks a lot about this. If you can provide concrete facts indicating that your income will return to where it was or higher a few months down the line, then the bank may look at it differently.
To sum everything up, submitting incomplete or incorrect paperwork can result in a denial. If you’re not in a position to cover the new payment structure the bank will not approve you. Your Equity is a determining factor and how the bank views your situation. You will also want to make sure you’re hardship letter precisely explains your position. The bank can deny your loan modification based on many more factors. However, we just covered some of the more prevalent ones.