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Short Sale, Loan Modification & Foreclosure Solutions

How to Appeal a Mortgage Loan Modification Denial


How to appeal if your mortgage loan modification is deniedWhen applying for a loan modification, you must prove two things to the lender:

  • You had a genuine financial hardship that prevented you from being able to make your original mortgage payments; and
  • You have now recovered and become financially stable enough to support a modified payment.

Presenting your income to the lender is all about finding the sweet spot that shows you’ve both suffered financial hardship and have recovered. You will either be approved or denied.

Lenders review your financial situation based on a snapshot in time. Usually, you are denied because you failed to demonstrate something related to the two factors above.

Some denials are final, but most are not. Most lenders allow you to appeal the denial.

Before you appeal, understand the terms of your denial

First, review your denial letter to see if it states a reason why you were denied. Lenders are required to tell you why you were denied. It is insufficient for them to simply state that you were denied. If the letter just says “we’re not approving you,” or “we don’t participate,” the lender may already be in violation of federal guidelines.

IMPORTANT: If you can’t identify why you were denied, bring your denial to an attorney as soon as possible.

Here are the top seven reasons why you may have been denied a loan modification:


This means that you haven’t proven to your lender that your original mortgage payment was unaffordable. The lender believes you could have continued to make your original mortgage payment but simply chose not to. The lender looked at your income, expenses and hardship information and determined that you did not suffer anything that impaired your ability to make your mortgage payment. This is the most subjective type of denial and can be easily appealed. Lazy lenders rely on this denial reason as a way to avoid having to do a comprehensive review of your file. Phrases that you may see in your affordability denial are:

  • “No valid hardship”
  • “Debt to Income Ratio (DTI) too low to approve”
  • “Original mortgage payment deemed affordable”
Debt to Income (DTI) Ratio is too high

If you are denied because your DTI is too high, this means that the lender thinks you have too many expenses and/or too little income to support modified payments. It means the lender doesn’t believe you will be able to make steady payments even if they were to approve you for a loan modification.

Defaulted on another loan modification OR re-applying too soon

If you were previously approved for a HAMP or FHA loan modification and were unable to either complete the trial or stay current on your modification payments, a guideline may be in place that prevents you from re-applying during a specified amount of time (12 or 24 months). Some lenders apply these barriers incorrectly to prevent the application process from going forward. Simply because you were approved previously for a modification does not necessarily prevent you from applying again. Lenders would like you to believe otherwise. A review of your type of loan, servicer and investor needs to be conducted to determine whether it the servicer can legitimately prevent another application.

Negative NPV/too far behind to make it profitable

If your lender believes they can get more money from the sale of your property than by modifying your loan, you may “fail” the NPV test.

Broker’s Price Opinion (BPO) is too high, and the lender thinks foreclosure will be more profitable

Lenders require a valuation of the property as part of their financial analysis. Unfortunately, they often don’t put very much effort into getting an accurate value. Sometimes, they will just drive by the property, take pictures and then look online for sample values. An accurate value of a home will only occur if a lender completes either a full appraisal or an interior Broker Price Opinion (BPO). Oftentimes, lenders need to be pushed to complete these. Many issues affecting a home’s value are inside the home and are not visible from the street. If the lender thinks the home is worth much more than it is, they may be unwilling to approve a modification because they think they will receive more money at foreclosure. Thus, you may have been denied because the lender has an inflated value of the property.

Immigration issue

Oftentimes, lenders find an issue with citizenship that prevents them from wanting to modify a loan or further engage with a borrower. They won’t be direct about the issue, rather they will simply stop responding to requests.

“The investor doesn’t participate in loan modifications”

This is something the lender states just to get out of having to modify loans. It is generally not an acceptable denial reason. In fact, it doesn’t even make sense. There is only one party involved in a loan modification transaction who can refuse to enter into a loan modification and it is NOT the investor. The lender can refuse to participate in loan modifications. However, often a lender claims they can’t service a loan modification because the investor doesn’t participate. In order for this to be true, the investor would need to produce their Pooling and Servicing Agreement (PSA). Within that agreement it would have to state that the investor does not, at any time, enter into loan modifications. Very few investors have this language in their PSA, but lenders use this excuse to avoid having to review borrowers for modifications. If you’ve been denied for this reason, request that the investor provide you a copy of their PSA. Likely, they won’t, which should indicate to you that the modification request likely wasn’t even presented to the investor and that their denial reason is simply an excuse.

Identify your best appeal strategy

Once you’ve identified why you were denied, it is important to make sure your appeal is a specific response to why you were denied. This is NOT the time for a brand new review of your loan modification.

There are two types of appeals:

  1. Appeal due to “changed circumstances.” If something changed between submission and decision (for example, you got a new job, lost a job, got married, are receiving more income or less income, etc.), write a letter explaining the changed circumstances and provide the supporting documentation that shows the change (new pay stubs, marriage certificate plus spouse’s income. etc.) Write “changed circumstances” and your loan number at the top of the letter and at the top of each page of supporting documentation.
  2. Appeal because the lender made a mistake or overlooked something you already submitted. You want your appeal materials to specifically address why you were denied.

Affordability and DTI denials can be appealed using an Income Review. This will help spot miscalculated income that needs to be corrected.

(If you're considering doing your own loan modification, this free guide will show you how to submit your loan modification documents the right way the first time. Download your copy here.)

You can appeal due to miscalculated income by showing: Increased expenses

If you were denied because of affordability or low DTI, one way to appeal is to show that you didn’t fully report all your living expenses. Many homeowners think that smaller expenses like dry cleaning, gas, medications, etc., aren’t relevant to their loan modification review because they average under $200. These expenses add up and are necessary living expenses. If you failed to report all expenses and were denied for affordability, appeal showing your full expenses.

Decreased expenses

If you were denied because of too high DTI, meaning the lender thinks you can’t sustain monthly mortgage payments because you don’t have enough household income, try decreasing and re-reporting your expenses. Some homeowners think that making yourself appear as desperate as possible will encourage the lender to work with them. In reality, the lender also needs to believe that you are financially stable. Try to cut back on extraneous expenses. Send in a new expense form showing that you’re living with minimum expenses, making the gap between your income and expenses larger. This will show the lender that you have enough income to both live and make regular mortgage payments.


A contributor is someone who is not on the original mortgage but contributes to household income. Lenders will only consider income from the borrower listed on the loan unless you tell them otherwise and provide them all supporting documentation for the contributor’s income (pay stubs, W-2s, bank statements, etc.) Providing contributor income depends on what you’re trying to show. If you are denied because your DTI is too high, meaning the lender thinks you don’t have enough income, you may want to appeal and include a contributor’s income. If you are denied for affordability, meaning the lender thinks you should have been able to afford your original mortgage payments AND you submitted with a contributor’s income included, you may want to re-submit your financials removing the contributor. To modify a loan, lenders are required to take into consideration all borrowers’ income but they only include contributors if you report it.

Note: If you include a contributor’s income and are approved for a loan modification, the new mortgage will be recorded under both names. Do not include a contributor’s income unless you are fully prepared to share the mortgage with them for the duration of the loan.

Bonuses / commissions

You may earn a structured, regular wage but you may also receive overtime, bonuses, or commissions. If you were denied for affordability, meaning the lender believes you should have been able to afford your original mortgage payments and you included irregular income like bonus or commission income, the lender may not have an accurate snapshot of your income. If you had a particularly great income month and you used that as a basis for your monthly income, the lender may have an inflated idea of your monthly income that doesn’t reflect your true wages. If you were denied because you had a particularly low month with no overtime or bonuses but you regularly receive overtime or bonuses, your lender may think your monthly income is consistently lower than it is.

Changing income

Some homeowners receive income that fluctuates, for example, L&I payouts, disability benefits, pension disbursements, etc. If the lender looks at a small snapshot in time, they may not understand how much money you bring in. If you are denied based on income, look back at the period of time your statements covered. You may have to increase or decrease the number of statements you provide if your income fluctuates from month to month. You always want the lender to have an accurate, holistic picture of your income situation. If you receive around $1,200 in L&I per month, but one month you received $2,400 to cover legal fees and you reported only the $2,400 month, the lender is going to think you’re receiving twice as much income as you are.

Profit / loss

Self-employed homeowners often have the ability to pay themselves a salary. Lenders use the profit/loss statement to determine your eligibility for a loan modification. If you are denied because of an issue with the salary you’re taking, there may be ways to leave more money or less money with the company to prove to the lender that you have control over your earnings and can earn what is necessary to continue making mortgage payments.

How to appeal an “Investor does not participate” denial

  1. Request a copy of the Pooling and Servicing Agreement (PSA)
  2. If they send it to you, scan for language that states that the investor does not offer loan modifications. If it’s not there, they likely issued an invalid denial.
  3. Send back the PSA and a letter of explanation citing RCW 61.24.163(4)(i) (if you’re in the state of Washington) and demand that you be re-reviewed. There are similar laws for other states. If you live in Arizona, call us if you need the exact statute.
How to appeal a “BPO too high” denial
  1. Send a letter highlighting the deficiencies present in the lender’s BPO. For example, the lender only used an exterior BPO, the comps were not actually comparable, size and age problems, etc.
  2. To be the most persuasive, you should send a fully prepared BPO supporting your value of the property.
How to appeal a “Negative NPV” denial
  1. Request that the lender provide you a copy of all NPV inputs used to calculate the value.
  2. Review all inputs used in the NPV analysis for errors. If you find errors, highlight them on the NPV input list and send it back with a letter of explanation highlighting the errors.
  3. Request that the lender run a new NPV analysis with the mistakes corrected.
  4. You can run your own NPV test here:
Tips for submitting an outstanding appeal
  • Chose one appeal strategy and stick with it. It’s beneficial to choose whether you want to appeal based on an error in your original appeal or on changed circumstances. Both are valid reasons to appeal but if you try to do both at once it may confuse both issues. Most lenders will have to check a box in their system stating which type of appeal you’re choosing. If you choose both, no box may get checked and then your appeal may fall through the cracks. We can help you determine which is your stronger argument if you are deciding between both.
  • Get your denial reason in writing. Receiving a verbal reason for denial isn’t good enough. The representatives may not know the actual reason and may say something general just to get you off the phone. They may also purposely try to prevent you from knowing your denial reason. The reason given in writing is the contractual reason they denied you. Getting the reason for denial in writing prevents the lender from being able to change the denial reason later if they find that you’re successfully appealing based on the verbal reason.
  • Appeal in the format your lender wants. Some lenders will specify how they want you to appeal. They will direct you to send a letter and supporting documents or they will ask that you check a box on the denial form and fax it back before you send the supporting documents. Read your entire denial letter to understand the correct appeal format. If it’s unclear, call your lender for clarification.
  • Demonstrate, don’t just explain. If you’re appealing because something has changed or was miscalculated, simply explaining the issue in a letter without supporting documents won’t be good enough. You have to demonstrate to the lender that you have support for your position.
  • Watch for your appeal deadline. Most lenders will set a deadline for appeals. Documents need to be delivered to the lender by that time. If you miss your appeal deadline, the lender has the right to refuse to review your appeal.
  • Don’t waste time appealing if you can’t afford your home. If your lender is right, and you were denied because you simply don’t have the income to keep making payments and you know that to be true, don’t appeal. You will likely be denied again and that appeal process will take a long time. If you are already within a foreclosure timeline, you’ll be right up against your foreclosure sale date. Other options that may have provided you relocation money to move may be not be available to you after your appeal.
Mediation and denials / appeals

Under the WA State Foreclosure Fairness Act, homeowners may be eligible for mediation. Mediation is typically very beneficial for homeowners in any stage of the loan modification process and is always beneficial in denial/appeal situations.

In mediation, you are able to ask your lender all your questions about the reason for your denial. If your lender denied you without running an adequate review, the mediator should enforce the lender’s compliance and the mediation should stay open while a legal review is performed. It’s always good to have the mediator’s support when the lender issues a denial.

Opposing counsel will send all appeal documents directly to the appeal department and you’ll have a much more streamlined way to hold the lender accountable.

The main difficulty with denials and appeals is not knowing what the lender is thinking. Mediation helps you figure this out so you know how to respond.

Keep in mind that this isn’t tailored legal advice. We would love to help you with your specific situation. Please call 1-800-603-3525 right now, or fill out this form for a free consultation with one of our attorneys.

Loan Modification Guide

Ark Law Group, February 20, 2019

Ark Law Group, February 20, 2019

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How to Appeal a Mortgage Loan Modification Denial

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