In these tough financial times, a lot of homeowners are desperately trying to obtain a loan modification to make their mortgage more affordable. If you're one of them, here are a few things you need to look out for.

Don't stop paying your mortgage

Many homeowners have reported that their lenders won't give them a mortgage loan modification unless they're behind on their payments. So they stop paying, only to have the bank foreclose. Many of these are subsequently suing their lenders on the grounds they were given bad information.

In some cases, homeowners have been able to prod their lender into granting a loan modification by being tardy on their payments. But the downside is highly risky. Aside from the risk of foreclosure, you'll start incurring late fees that will likely have to be repaid or rolled into the mortgage if you do succeed in getting a modification - you can't assume you lender will waive them.

In addition, you're going to take a hit on your credit score as soon as you miss a payment. If you should fall behind by 90 days or more, you'll take major hit that will drag your score down for seven years, comparable to a foreclosure or bankruptcy.

You don't have to be behind on your mortgage payments to qualify for a government loan modification through the Home Affordable Modification Program (HAMP), although lenders may prioritize delinquent loans for processing. Instead of stopping payments, use your hardship letter (part of applying for HAMP) to document that your current payments are unsustainable.

If you do opt to stop payments, be sure to set aside the money you would have used to pay your mortgage in a savings account. That way, you can still bring your mortgage current if asked to do so - and which lenders sometimes demand as a condition of granting a loan modification.

Don't neglect to keep records

One of the main complaints homeowners have about applying for loan modifications is that they keep getting asked to submit the same records over and over again, sometimes amounting to hundreds of documents.

When inquiring about a loan modification, ask your lender to send you a letter describing everything you need to submit for your loan modification application, including all documents, records and forms. Make copies of everything you send, and send them by registered mail, so someone has to sign for it. That way, you've got proof it was received and the name of the person who accepted it.

If you lender allows it, you can also submit records and documents electronically, and request confirmation the email was delivered and opened. That way, you have all the records in your possession, the name of the person they were sent to and proof it was received.

Don't pay a big fee for loan modification "assistance"

A lot of companies have cropped up the past few years offering to assist homeowners in getting mortgage loan modifications from their lenders. Many even guarantee results. But all too often, financially pressed homeowners pay thousands of dollars for these services and end up with nothing to show for it.

The fact is, you don't have to pay to get a loan modification. There's little or no negotiation involved - the lender looks at your numbers and either approves it or doesn't. It's mostly a matter of getting your paperwork together and there are any number of HUD-sanctioned debt counseling agencies that will help you do that for free (you can find them through the HUD web site).

If you do decide to hire professional help, you shouldn't have to pay more than a couple hundred dollars up front, if that. Any major fees - say of $1,000 or more - should only be paid AFTER the loan modification has been approved and is in place. Don't accept a "guarantee" of a loan modification in return for an upfront payment - that's not a promise they can keep, though they can keep your money.

If you use a loan modification service, NEVER SEND THEM YOUR MORTGAGE PAYMENTS!!!!! This is a major red flag. There's no reason for a legitimate credit repair company to receive or hold your mortgage payments for you, and scammers will just keep the money for themselves. If the money needs to be held in an escrow fund or paid on a particular schedule, a legitimate company can instruct you on how to do that.

If you want professional assistance, your best bet is to hire an attorney who specializes in debt matters. You'll have to pay a retainer of several hundred dollars upfront, but at least you won't be on the hook for a major bill unless you get results.

Don't assume HAMP is your only option

Many financially pressed homeowners get frustrated because they are unable to qualify for a government-backed HAMP loan modification. However, HAMP is not the only game in town.

In fact, you're actually more likely to obtain a private loan modification from your lender directly rather than a HAMP mod. The rules are not as strict, since they're up to the individual lenders themselves. However, the terms on private loan modifications tend to be less generous to borrowers, so try to get a HAMP mod if you can.

You won't be able to get a loan modification of any type if you're unemployed, but that doesn't mean you're out of options. If you're got a reasonable shot at finding a new job in the months ahead, you may be able to obtain a forbearance, in which the lender agrees to suspend your mortgage payments for a certain length of time without pursuing collection efforts.

Depending on the state you live in, you may be able to get mortgage assistance through the Hardest Hit Fund, which provides temporary help for unemployed and financially pressed homeowners. Other programs may be available as well. For more information, contact your state housing finance agency, or a HUD-sanctioned credit counseling agency in your area.

Published on September 10, 2011