Three Reasons Why Loan Modifications Go Bad

Three Reasons Why Loan Modifications Go Bad

Loan modifications are a great way for troubled homeowners to get back on track with their mortgage payments and avoid foreclosure. But why are so many mortgage loan modifications getting rejected and how can you avoid that happening to you?

For millions of people facing and dealing with a foreclosure, seeking a loan modification from the bank may seem like the ideal way to get help. A loan modification has helped thousands of homeowners stay in their homes by reducing their payments, by reducing their principal, or by providing some other type of financial relief. Most loan modifications, however, are rejected by the bank.  Here are some of the reasons why and how you can avoid them in order to help ensure that your mortgage loan modification application is a successful one. 

Failure to Prove Ability to Pay Under New Terms

One of the most common reasons why a loan modification is rejected by the bank or lender is because the homeowner has not proven that they will be able to pay the mortgage payment under the new terms. If a homeowner cannot prove that they can pay even if a loan modification is reached, it would be in the lender’s best interest to foreclose on the home in most cases rather than agree to the modification. The modification would only delay the process of foreclosure which means the lender would lose even more money.

If you are going to apply for a loan modification, make sure you have ample proof that you will be able to pay the loan under the new mortgage terms. You may need to provide tax statements, pay stubs and a written budget to your lender to show that you will be able to make the new lowered payments without any problem. Otherwise, there is a good chance that your loan modification will be rejected.

Failure to Show That You Have Difficulty Paying Current Terms

Another common reason that loan modifications are rejected by lenders is because the homeowner does not show any difficulty in paying on the original mortgage loan agreement. If you have been paying your mortgage loan on time every month, your mortgage lender is not going to go through the trouble of modifying your loan and offer you lower payments because you have shown that you can make the original payments. A lender is not going to modify your mortgage loan simply because the home’s market value has dropped drastically.

You obviously should not try to prove a financial hardship that does not exist and you certainly should not stop making your mortgage payments in the hopes of getting a mortgage loan modification. Instead, explain to your lender what has changed in your financial situation. Have you lost hours at work? Have you been laid off? Do you have a medical problem that is causing you to miss a lot of work? You will need to prove that you have a financial hardship before a lender will even consider modifying your loan. If you have some written proof that shows a change in your finances, you will have a better chance of getting your modification approved.

Failure to File Completed Paperwork Package

Incomplete paperwork and documentation is also a leading cause for a mortgage modification getting denied. Your lender will want to see your tax returns, pay stubs, bank statements and other financial papers in order to consider a loan modification. All of this helps them determine if you are eligible. Unfortunately, a homeowner may not know that they have incomplete paperwork until after the modification has been denied.

To avoid falling into this problem, get a checklist from your lender regarding the paperwork they will require in order to consider a loan modification. Make sure you get everything ready from the checklist when you submit your application. You may even consider asking the lender’s representative to check your paperwork before you submit it to make sure you have everything that you need.

These are just a few of the problems that can occur with a mortgage loan modification. But if you follow the suggestions on how to avoid these problems, you will dramatically increase your chances of your loan modification being approved so you can get back on track with your finances.

Image: Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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