A home modification is a change in the terms of the loan made by the lender. The modification usually occurs because the homeowner can't meet the original terms of the loan or because a loss in the value of the home means the homeowner has little or no equity. No hard and fast rule says you can or can't refinance after a loan modification. For several reasons, however, lenders may give you a new loan.
Following the mortgage meltdown that began in late 2007, housing prices dropped until many homeowners found they had no equity left. The financial crisis that ensued increased unemployment and reduced the incomes of many who remained employed. Many homeowners could no longer make their mortgage payments. Some walked away from their houses or went into foreclosure. Others began negotiating with lenders over the terms of their loans. When the negotiation succeeded, the result was a loan modification.
In 2009, the Obama administration initiated the Making Home Affordable program, which offered free loan counseling and other programs to make it easier for homeowners to modify loans. Until then, the process of getting a mortgage modified was notoriously difficult. Homeowners needed to complete extensive application packages, and one minor error in the application could derail the process. Even then, many homeowners found, lenders sometimes asked for the same documents over and over and began foreclosure proceedings amid modification. Even with the Making Home Affordable program in place, about 80 percent of supposedly eligible homeowners were unable to qualify. Reports of banks losing papers or repeatedly asking for the same documents continued.
Why You May Be Able to Refinance
You may be able to refinance a home loan following a modification of the mortgage terms because the modified terms make you financially able to satisfy the debt. In most cases, the mortgage payment on a modified loan won't exceed 31 percent of monthly income. This is a little high but not unacceptable. "The Wall Street Journal" notes that most lenders look for 28 percent or less, but lenders consider that you are already in your home and won't have the costs associated with moving. Moreover, following the financial recovery that began in 2009, your wages might have increased since you completed the modification process. In the same period, housing prices generally increased, so you're probably offering the lender more security for the loan than the house represented when you completed the modification.
In the process of the loan modification, you demonstrated that you have characteristics that lenders look for in a borrower. You didn't walk away from the mortgage, and you didn't fall hopelessly behind in your payments without taking remedial action. Instead, you went through a very difficult process, overcoming many hurdles. You submitted the loan documents in a timely way, corrected any errors and resubmitted them when necessary, perhaps several times, until you got the modification you asked for. You succeeded when most homeowners failed. Some lenders may not take your success into account, but others may.
Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.