5 Reasons Your Loan Modification Application Can Be Denied

Loan modification allows you to renegotiate the terms of your mortgage or other loans in order to get a better deal. Loan modification favors the borrower, so lenders will be hesitant to move forward unless you provide significant reason for them to do so. As such, you will need to apply for modification, but the lender can still deny your request. Here are the 5 most common reasons for denials:

#1 Your Loan is Not in Good Standing

You need to pursue modification prior to your loan entering delinquent or defaulted status. If you have not made mortgage payments for a number of months, your lender will already be taking steps to rectify the situation independent of your request. These steps may include foreclosure. Start your loan modification application while your loan is still in good standing so you have more pull with your lender.

#2 Your Credit has dropped

If your credit score has dropped over the life of your loan, you will not likely be able to get a better loan now than you did when you first sourced your mortgage. Instead, you will perhaps be subject to less favorable loan terms. You will only truly have the power to bargain on a loan if you could reasonably go to the free market and get a better loan elsewhere. The main exception to this is modification due to hardship.

#3 Your Hardship Letter is Rejected

Modification due to hardship occurs when you provide sufficient information to show you can no longer pay the loan according to the given terms. In order to be approved for this type of modification, you must show you previously made all of your payments. Then, you must show there is an immediate unforeseen emergency that will prevent you from doing so in the future, such as a job loss or medical expense. Finally, you must show you cannot make loan payments as a result of this emergency for an indefinite period in the future. If any of these factors is absent, your hardship letter may be rejected.

#4 Your Loan Terms Preclude Modification

When you sign your loan contract, you agree to certain terms. In these terms, you will find exact rules regarding when and how you can modify your loan. Some loans will not permit modification at all. Lenders put this in the terms to prevent the loss of future profits. If your terms preclude modification, any request to do so will be denied up front. You will instead have to take a more favorable loan from a third party to pay off your initial loan in full. Your initial lender will charge you a fee and report you to the credit bureaus for doing this.

#5 The Market is Unfavorable

Even if all of your personal factors should qualify you for modification, there are some items outside of your control. Your lender may be in a position where it is losing money on a large amount of loans due to market conditions. In this case, nearly every application to modify will be denied because the lender simply does not have the flexibility to help you at the current time.