You previously fell behind on your home loan then diligently worked with your lender to successfully mend default with the help of a loan modification. Someway, somehow you’ve ended up right back on the old saddle of stress again – months behind on payments or days away from being there. You are not alone – many homeowners either get approved for modifications before fully recovering from the financial hardship that lead to missed payments in the first place or else, have experienced new and unrelated circumstances that limit their abilities to pay.
Ask yourself these questions when applying for or deciding if you need to apply for a secondary home loan modification:
Is it possible or will it be more difficult to get another modification?
Yes, it is possible to get a second loan modification though statistically it’s obvious that you are less likely to get a second modification if you’ve had a first, and a third if you were lucky enough to get a second. It is possible though. In fact, the majority of homeowners currently applying for modifications have already had some kind of work out option and a decent number of them do get approved. As long as you want to keep the home and have the stability and income to afford reasonable payments, there is no reason to not apply if you are falling behind on modified payments and cannot catch up through conventional methods.
Also, though secondary options may not be as automatic as the first time around – the actual process of getting a decision may be drastically less difficult, especially if you had originally worked with your lender in the first few years of the mortgage crisis. Whereas in years past, service centers were correctly characterized by disorganization, modern loss mitigation departments now have the benefit of applicable experience to help aid a more standardized and accountable process. In addition, homeowners now benefit by generally getting more individual attention as there is less competition as national foreclosure numbers have declined in recent months.
Will a new modification better my situation?
This is where things can vary greatly depending on your situation and where the need to meet with a free HUD certified foreclosure prevention counselor magnify. In some cases, re-modifications can provide payment and interest benefits, an actual goal of most servicers since lower payments and reduced interest naturally lead to a higher level of retention. With that said, in other cases it is very predictable that a reworking of mortgage terms would lead to an actual increase in rate and or payments.
For instance, if you were initially approved through the federal HAMP modification program and were provided “special” terms like below market interest rates, elongated maturity term (40 year amortization) and any level of principle deferment, then there is almost a certainty that a conversion to a “traditional mod” would come with elevated rate and payment when reconfigured using standard terms recast at market rate void of partial deferment all while beefing up the balance by adding in freshly missed payments. In addition, even with modifications that did not initially use special terms, market rates today are almost a full point higher than where they were just one year ago.
On the other hand, if you had qualified for a traditional modification previously and have a mortgage eligible for the HAMP program with also having a qualifying hardship and level of income, the terms may improve as a result as it would be considered a necessity to affordability. Regardless, it is important prior to missing payments on any mortgage, much more so a previously modified one, to have a HUD counselor look over your current terms to see what may result far before you are to depend on re-modification. Ideally, this would inspire you to look at other budgetary solutions and prevent being forced to accept less advantageous terms if losing the home is just not something you are willing to let happen.
Is the approval process different the second time around?
Yes, the application process can be more in depth than the first time. In many instances, lenders approved mods on first time delinquency based upon the observation of an uncontrollable hardship and with the evidence that income is currently sufficient to make payments if the mortgage was prioritized first and foremost by the homeowner. The HAMP program is a perfect example in that if a homeowner’s payment consumed more than 31% of gross income, it could be approved regardless of whether or not the modified payment fit with other listed expenses or additional debt.
In secondary or traditional modifications or those requiring the permission of an insurer (FHA, ect), much more scrutiny can applied to the submitted budget outlining the projected expenses and the bank statements required to cross verify holistic affordability. Less automatic is the assumption that just because you are applying you are ready, motivated and able to make payments. More care in underwriting goes into whether or not it is realistic based on objective data to predict future improvements. In short, with second opportunities you may need to do more than just want it, you may actually need to document that you can be successful prior to becoming approved.
So how do you document that?
Easy, make sure you have at least as much in savings as what a first payment might be when you apply to show you have the ability to start. Next progressively save money monthly to show you can stay caught up if the past due payments were added to principle. Lastly, ask yourself “what would the lender think” before you make every transaction as a rule of thumb underwriters often use is “what if it were my own money?”
Believe it or not, lenders are rewarded for offering modifications and further profit by preserving residual servicing fee streams from the investors – however, they are also penalized by those same investors if loss mitigation success rates are less than standard and only serve to drag out inevitable defaults while slowly eroding what’s left to recover upon liquidation. Some files are issued automatic computerized decisions – however, many don’t perfectly match the investor matrices and need a manager or senior underwriter’s consent before approval. It doesn’t take a Ph. D to grasp that it’s easier to gain the support of decision makers if you are saving money and using discretion with consumer purchases vs. spending money on non-essentials in the wake of a possible foreclosure.
Overspending on meals out, entertainment, tobacco and liquor store purchases while applying for modification can cost you an approval if it leads to a lack of savings. Why shouldn’t it? Banks exist to quantifying risks for profitability and to wager on someone who orders take-out, pay-per-view and catalog clothes while saying they are doing everything they can to avoid foreclosure after missing payments carries abysmal odds. I know what you are thinking and no, withdrawing cash from your account and using it buy the things you don’t want the lender to know about doesn’t actually cloak your activities – worse, it may lead others to suspect there is a drug or gambling problem at hand or just plain old boring instability when the end result is a lack of both savings and payments.
Other things to consider:
Sometimes you need patience to apply
Many investors have rules regarding how long after the first modification you can apply. In some cases it doesn’t matter, in others at least 1 year must have elapsed since conversion to the permanent loan and some investors don’t allow second modifications period. By contacting the servicer or else working with a HUD counselor, you should learn how it applies in your situation.
Hardship needs to be fresh
Many investors require there to be a separate hardship involving an involuntary drop or hiatus of income to qualify. In short, your layoff from 2011 doesn’t work anymore if you were already modified in 2012. Hardships should be involuntary and affect income.
Don’t trust paid helpers
I have noticed that some scam artist for-profit modification outfits liken their value and need to those of disability attorneys.
They claim hiring a professional the second time around is necessary to get the deal you deserve – however, third parties can hurt you more than they help as they deplete your savings with their fees.
In turn this illustrates your inability to afford payments, rather than an ability to do so. It is never wise to enter into an agreement with a for-profit modification helper as they do not provide any actual advantage with potential outcome – however, you can help through a HUD housing agency for free.
Our HUD-certified housing counselors can help you assess your options around loan modifications. Give us a call at 888.577.2227 to speak with a counselor about protecting your home. Or visit our website at ConquerYourDebt.org.
Author Tim Fischer is a Foreclosure Prevention Counselor at LSS Financial Counseling.