What to do after loan modification application gets denied

Article by Hayley Harrison, Former Branch Manager and lending officer for a community bank

Loan modifications offer a lifeline to homeowners drowning in unpaid mortgage debt, but lenders will not always accept loan modification applications. If you find yourself facing a turned-down application, you need to act quickly, but wisely, to prevent foreclosure.

Enlist Help

The foreclosure process varies in every state, but always involves a complex set of laws. Fortunately, trained professionals can help you sort out the regulations and make a smart decision about what to do after a modification request denial. Some sources of help include:

· Housing Counselors specialize in assisting people facing foreclosures and can help you understand and explore your options. Look for an agency affiliated with your state government or one that is “HUD-approved,” meaning that the federal government has reviewed its business practices and determined that it is a reputable organization.

· Attorneys represent borrowers in foreclosures by negotiating terms on their behalf. They can also advise you on what steps to take and help you understand the terms of any contracts between you and your lender.

· Accountants can clarify the tax implications involved with foreclosure alternatives. Some options carry tax penalties, which could end up costing you a hefty sum when it comes time to file your income taxes.

Explore Your Options

Once you have enlisted the help of qualified professionals, you’ll have to explore your options for foreclosure alternatives.

· Short Sales allow you to retain ownership of your property, though you must agree to sell it. With this foreclosure alternative, your lender agrees to accept a lower amount than your debt after the sale of your home to keep you out of foreclosure. Often, the lender forgives or cancels the remainder of the mortgage balance.

· Deed-in-Lieu agreements are similar to short sales in that your lender agrees to settle for a lower amount; however, with these agreements, you sign ownership of your home over to your lender. Usually, deed-in-lieu arrangements have less impact on your credit than foreclosures.

· Bankruptcy is a legal process that discharges some of your debt obligations. In some cases, you may be able to retain your home in a bankruptcy.

Avoid Scams

As you consider your options, be wary of foreclosure rescuers. These services buy your home from you and then promise to allow you to pay rent to them and eventually buy back your house. Usually, these services do not deliver on their promises and either keep you indefinitely as a renter or evict you from the home.

To protect yourself against foreclosure-related scams, keep the following tips in mind:

· Don’t change how you pay your loan. Never give your mortgage payments to a third party to make on your behalf.

· Be wary of “free” help. Offers from for-profit agencies are likely to have hidden fees somewhere.

· Read agreements carefully. If you’re hiring a counseling service to help you, don’t sign a contract without reading it carefully. Scammers often hide sales clauses within contracts to prey on unsuspecting homeowners.