You might have previously fallen behind on your home loan, then diligently worked with your loan servicer to successfully prevent default with the help of a mortgage loan modification. Over time, however, you might have found it challenging once again to keep current on mortgage payments. You are not alone.
Many homeowners get approved for loan modifications before fully recovering from the financial hardship that led to missed payments in the first place, or they have experienced new and unrelated circumstances that limit their ability to pay.
Applying for a second home loan modification is an option. When you consider this option, ask yourself the questions below.
How difficult will it be?
Statistically, you are less likely to get a second modification if you’ve had a first, and even less likely to get a third if you were lucky enough to get a second. However, it is possible. Many homeowners who apply for modifications have already used some kind of mortgage assistance in the past, and a decent number of them do get approved.
It makes sense to apply for another loan modification if:
- You are falling behind on the modified payments.
- You haven’t been able to catch up using conventional methods.
- You want to keep the home.
- You have the stability and income to afford reasonable payments.
This time around, you might even be able to get a second loan modification through a streamlined process, because several government investors in mortgages implemented more efficient processes for applying for mortgage assistance during the COVID-19 pandemic. The first step is to call your mortgage servicer to ask what options are available to you. You might or might not need to fill out an application and submit documentation as part of the process.
Will my situation improve?
This can vary greatly depending on your situation. In some cases, loan modifications can provide payment and interest benefits. This is a goal of most servicers, since lower payments and reduced interest naturally lead to a higher level of retention. In other cases, it is very likely that reworking the mortgage terms would lead to an actual increase in interest rate and/or monthly payment.
For instance, if you were initially approved through the federal Home Affordable Modification Program (HAMP) and were provided “special” terms like below-market interest rates, an extended repayment schedule (such as a 40-year term), and/or any amount of principal deferment, then it is almost certain that a conversion to a “traditional” modification would come with a higher interest rate and payment. The servicer would almost certainly finance the deferred principal back into the modified loan, as well as the recent missed payments; this would mean a higher, non-deferred principal balance on the mortgage and more interest paid over time. In addition, even with modifications that didn’t initially use special terms, market rates today are higher than the rates many homeowners currently have on their mortgages.
On the other hand, if you had qualified for a traditional modification previously and have a mortgage eligible for a loan modification (and you also have a qualifying hardship and level of income), the terms might improve after the loan is modified.
To discuss these different scenarios, schedule a free, confidential appointment with one of our HUD-certified housing counselors. It is best if you meet with a counselor before falling behind. They can determine whether you are likely to receive another modification and whether the terms are likely to be advantageous for you. If you’re not likely to get a second modification and/or advantageous terms, you would be able to look at other budgetary solutions before falling behind, if losing the home is something you wish to avoid.
Is the approval process different the second time around?
Yes, in some cases there might be a more streamlined process available. However, it’s also possible that the application process will be more in-depth than the first time around. In many instances, servicers approved first-time loan modifications based on their observation that the borrower was experiencing an uncontrollable hardship — along with evidence that the homeowner’s income was currently sufficient to make payments if the homeowner prioritized the mortgage first. The HAMP program is a perfect example.
In secondary or traditional modifications or those requiring an insurer’s permission (e.g., the Federal Housing Administration (FHA)), your servicer may apply more scrutiny to the expenses you list on your application. For example, they may look at your bank statements to verify that you are spending roughly the amount you listed in each category. The servicer is also less likely to assume that just because you’re applying for a modification, you are ready, motivated, and able to make payments. In short, you might need to do more than just want it; you might need to document that you can be successful before they will approve your application.
How do I show I’m able to make my mortgage payments?
One way is to have at least as much in savings as your first payment might be. Develop a habit of setting aside at least as much money into savings each month as your mortgage payment. This will show that you can make your payments moving forward if your mortgage is brought current through a loan modification. Also, ask yourself, “What would the loan servicer think?,” since an underwriter’s rule of thumb is often, “What if it was my own money?”
It’s easier to gain the support of these decision-makers if you are saving money and using discretion with consumer purchases versus spending money on non-essentials. Overspending on items such as meals out, entertainment, tobacco and liquor store purchases while applying for a modification can cost you an approval if it leads to a lack of savings.
Other things to consider
Sometimes you need patience to apply.
Many investors in mortgages have rules regarding how long after the first modification you have to wait until you can reapply. In some cases, at least one year must elapse from the time of the modification, and some investors don’t allow second modifications.
The hardship needs to be fresh.
Many investors require there to be a separate hardship involving an involuntary drop in income for you to qualify. In short, your layoff from 2023 doesn’t work anymore if your mortgage was already modified in 2024. Hardships should be involuntary and affect income.
There are other options.
Loan modifications are just one option that mortgage servicers can offer to help borrowers bring their mortgages current. There might be an option to defer the missed payments to the back of the mortgage without changing the terms of the loan. If the hardship was temporary and your income has increased since you fell behind, you might be able to get caught up through a repayment plan. This would mean you pay more than your mortgage payment each month until you pay off the arrears. FHA has even offered an option where they lower your payments temporarily through a payment supplement, and that amount can be put on the back end of the loan.
However, you don’t necessarily get to choose which option you get. Mortgage servicers don’t typically provide a list of the options that are available to you and allow you to choose which one you prefer. Rather, they follow the investor’s guidelines about which options must be offered in certain situations.
Don’t trust paid helpers.
There are some for-profit loan modification companies out there that claim that hiring a professional the second time around is necessary to get the deal you deserve, However, these third parties can hurt you more than they help, as they deplete your savings with their fees.
In turn, this illustrates one’s inability to afford payments, rather than an ability to do so. It is never wise to enter into an agreement with a for-profit loan modification company; they don’t provide any actual advantage in getting a better outcome, Plus, you can get help through a HUD-certified housing counseling agency for free.
Our HUD-certified housing counselors can assist you in assessing your loan modification options and explore other strategies with you to protect your home. Give us a call at 888.577.2227 to schedule free, confidential appointment.
Author Cassy Burr is a foreclosure prevention counselor with LSS Financial Counseling.
