If the bank declined your application for a mortgage modification, and the sheriff is not at your door with a foreclosure notice, consider yourself lucky. Foreclosure is usually the next step unless you move fast. A loan modification is for homeowners who have already defaulted on at least one payment and are in pre-foreclosure, or are close to defaulting. You may qualify under a different assistance program. There are two main types of loan mods: the government's Home Affordable Modification Program and a negotiated modification under your lender's own program.
Talk to Your Lender
As soon as you find out your application has been declined, go to your lender and ask why. This is not a time to be shy. It is possible that you were declined because of a simple paperwork issue. With the volume of loan modification applications that most banks are receiving, lost paperwork is common. There may be a problem with your eligibility. Under HAMP, you must demonstrate a financial hardship such as divorce, disability or death of a supporting family member. If your hardship is unemployment, you may qualify to have your payments suspended for up to 12 months or longer under the Home Affordable Unemployment Program, or HAUP. If you make too much money to qualify for HAMP, you may still be able to negotiate a temporary modification under your lender's own guidelines. The important thing is to ask questions and demand detailed answers. If you can, get the answers in writing.
Call for Help
If you have already received a foreclosure date — generally the date your house will be auctioned on the courthouse steps — your best move is to file an emergency bankruptcy to stop the foreclosure. A friend or relative may tell you this is an easy thing to do yourself, but unless you know what you are doing, consult a lawyer. If you don't have a foreclosure date set, call the U.S. Department of Housing and Urban Development and ask for a referral to a HUD-approved housing counselor. Be prepared to explain exactly why your lender denied your application. If your loan is an FHA or VA loan, those entities have different requirements for mortgage modifications, and your HUD counselor will be able to help you prepare an application to meet their requirements. If your loan is not owned by Freddie Mac or Fannie Mae, you will need help in negotiating with your lender under different terms.
It is possible that your modification application was declined because your lender determined that you would not be able to pay, no matter how your loan could be modified. If this is the case, you can't afford to keep the house. This is a possibility to consider. You might be able to sell the house rather than have it foreclosed. A short sale is a way to sell the house at market price and have any unpaid balance left on the loan forgiven. This must be arranged through negotiation with your lender. It may buy you time in your home, to prepare an alternative place to live, until the property is sold.
If you can increase your income or decrease your expenses enough, go back to your lender with proof that you can now afford modified loan payments because of getting a second job, disposing of expensive leased vehicles or whatever else you must do to improve your monthly cash flow.
If you discover that your application was declined because of paperwork or not meeting a particular requirement, start the application process again. Get help with preparing your application from your HUD counselor and correct any errors in your first application or supply adequate supporting paperwork. When supplying paperwork, always ask for a receipt to prove the paperwork was submitted on time as required.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.