November 23rd, 2009

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Step-by-Step Guide to Rental Property Loan Modification – Part IV Decision Time

Step 5A: Initial Decision – Denied

You will receive a phone call or letter about the decision on your file, based on if there is an available in-house modification program for your financial income to expense ratio. As we mentioned before, investment property currently does not qualify for any federal government programs.

Don’t be surprised if you receive a denial letter after a long wait. The most common reasons for rejection include surplus (too much income or too little expense), debt (insufficient income or high expense), inability to do a modification for an investment property (because no program is available), insufficient documentation, or unavailability. It’s very important to dig out as much information as possible from the phone representative or the negotiator to know the exact reason. There are usually measures you can take to correct the problems.

You may be also surprised that the cited denial reason is inconsistent with the financial worksheet you submitted. For example, you might be denied for having too much debt each month, whereas your financial worksheets listed a surplus. Keep in mind that your financial worksheet is usually for your negotiator’s reference and he or she may have a different calculation based on other documents she gathered, such as your income proof and credit report.

The negotiator may also exclude some income deemed ineligible or not include some rental property expenses you listed. You will want to talk to your bank to know the exact income and expense figures they were based on to make the denial decision. Compare the figures to your own financial worksheet to know what could have been calculated differently. The negotiator can also overlook some legitimate income or expenses, which you should ask for corrections right away.

Another denial reason is insufficient documents. Even though you have waited patiently, the negotiator does not usually appear as patient as you are. (S)he may quickly reject your case simply because you failed to provide requested documents within a few business days. You may be also rejected due to un-answered phone calls or disconnected phone number. It’s important to keep communication channel open during the final review period. Make sure your bank has your latest contact information, and answer or return phone calls promptly.

Don’t count on the standard messages printed on the denial letters. They do not explain the actual reason in detail. Talk to the phone representatives and the negotiator to gather specifics so you can ask for corrections.

If the rejection reason can’t be corrected right away for example insufficient income, your best bet is to wait until your income improves or expense reduces and follow the same procedure to apply for loan modification again.

If the rejection reason is something that can be corrected right away, such as insufficient documentation, unavailability, or the calculation of your income and expenses were incorrect, take the following measures right away to have your case reopened and reviewed again.

1. Correct the error and ask the negotiator to reopen your file:

Your negotiator should be the first line of person you try to learn more about the rejection reason and ask to make a correction in order for her/him to review your file again. For example, when it’s cited that there is no program available for investment properties, the negotiator reviewing your file may not be aware of all the programs available. Ask her/him to double check their internal modification programs. Very few banks do not work with investors nowadays so you should not give up.

2. Ask for help from the negotiator’s supervisor:

Your negotiator may want you to resubmit the entire loan modification package, meaning you will be back in the waiting queue. Our recommendation is to ask for help from the negotiator’s supervisor. Usually the supervisors have more resources to help. They may be aware of other available programs for investors, able to modify incorrectly entered financial data or reopen your case, etc. Explain to the supervisor why your file was denied and how you want them to help you.

3. Contact bank’s executive offices

If the supervisor still cannot help you and you believe you have a strong case, contact the banks’ executive office. Most banks now have full time staff to handle loan modification escalations due to the complexity of evaluation process and frequent mistakes made by the negotiators or their systems. The staff in the executive offices is usually very helpful and can resolve an array of problems you encounter. They can also expedite your case if it has exceeded normal processing time.

Do-It-Yourself Kit: Rental Property Loan Modification includes detailed information about your banks’ escalation process and the most effective phone or fax numbers to seek for help when your case is unfairly rejected. You will also learn when and how to escalate your case to achieve the best results.

Step 5B: initial decision – trial or forbearance

It’s a major progress if you receive a trial or forbearance period after the review. The trial period can last from as short as two month to as long as six months. The purpose of trial period is to reassure that you are able to make the new payment amount before the banks proceed with permanent modification.

There are many variations what programs your bank will put you on during the trial period. One common program is to reduce you monthly payment during the trial period and the reduced amount does not have to be repaid at the end of the trial period. The banks can reduce your interest rate or extend the loan terms to calculate your new payment amount. Once the trial period is successfully completed, your loan will be permanently modified to the new lower interest rate or term with similar monthly payment amount.

Another common program is to temporarily reduce your payment during the trial; however the difference has to be paid back at the end. This program can usually give you more relief or reduction during the trial, however you may face difficulties to repay the difference at the end. You may have to renegotiate with the bank to seek for a permanent solution after the trial period.

Step 5C: Final review and modification

It’s extremely important to make the right amount mortgage payment on-time during the trial period. If you used to pay your mortgage on the 15th of the month, now pay it exactly on the 1st of every month. Most banks do not permit grace period during trial. Check back with your bank monthly to ensure your account is in good standing. Don’t be surprised that some bank’s system doesn’t fully synchronize with their loss mitigation department in real-time and can charge you late fee when you pay a different mortgage amount. Don’t let this happen or screw up your trial period. Ask for corrections as soon as you discover any problems.

Remember to ask your bank to mail you permanent loan modification documents at least two months prior to the expiration of your trial period. You can be asked to provide updated financial information. It’s also very important to make sure that the new loan terms are consistent with your expectation, for example how long the new interest rate will be fixed or if there is pre-payment penalty. If you have accumulated late fees or penalties in your account due to late payments, it’s also this time that these fees are eliminated and your account is restored to good standing.

It’s a brand new start when you sign new loan documents. Congratulations on following through this journey.

Read Part III «

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