Loan modification-which means officially changing the terms of an existing mortgage-is one of the best methods to prevent foreclosure. But those facing foreclosure aren't always eligible for loan modification, because the terms and conditions may be hard to meet.

When the foreclosure crisis began to impose a serious toll on the nation's housing market, one of the first steps taken by Washington officials was to meet with mortgage industry executives and ask that they do voluntary loan modifications whenever possible. But they didn't go to the extreme of passing legislation making modification mandatory; so most lenders paid only lip service to the idea without taking any dramatic steps to proactively help borrowers avoid foreclosure.

Time passed, and now, many of those same banks and mortgage companies wish that they had been more aggressive in regard to working out loans, instead of letting them go to foreclosure. Scores of borrowers who were previously considered lower risks are now threatened with foreclosure, as the credit crisis spreads across the prime mortgage sector. Meanwhile, the homes held as collateral by banks are continuing to lose value, and that means that foreclosure is becoming an even more costly option for lenders.

Saving your home with loan modification

Agreeing to loan modification, on the other hand, may ensure that the home remains a viable collateral asset and that the homeowner remains a paying customer. Whenever the real estate market bounces back, banks will be able to recoup profits. But if they get stuck with foreclosure homes now, they stand to lose considerably larger amounts of money. Loan modification represents a temporary strategy to help both lenders and homeowners to prevent foreclosure, weather the storm, and come out ahead in the end.

The first step toward loan modification involves contacting the lender and setting up a meeting to discuss such a possibility. To convince a lender to allow more lenient or manageable mortgage terms, it's important to demonstrate an inability to repay the existing mortgage. But it's also critical that the borrower show an ability to successfully repay the modified loan. Otherwise, the lender has no financial motive for reworking the mortgage. Those with the best chance of getting approved for a loan modification are homeowners with good credit, a steady income, and an unusually expensive adjustable-rate loan.

Foreclosure difficulties

Those already having trouble paying their monthly installments with a predictable fixed-rate loan, or those with a long history of bad credit who shouldn't have been offered the loan in the first place, will have a more difficult time convincing lenders to show leniency. But it's definitely worth it to try for loan modification, especially for homeowners with an otherwise decent repayment history who got trapped in a high-risk loan during a collapsing housing market.

Loan modification can stop foreclosure, but only if you act fast. To add more clout and professional negotiating power to the request, hire an attorney to represent you as you present your

Published on September 18, 2008