Getting a mortgage loan modification can be a big help when you're in tough financial straits. However, the mere fact that you've been able to get a loan mod may not by itself be enough to ensure that you can stave off foreclosure.

Getting a mortgage loan modification can be a big help when you're in tough financial straits. However, the mere fact that you've been able to get a loan mod may not by itself be enough to ensure that you can stave off foreclosure. You have to get a good one that suits your circumstances.

According to the U.S. Office of the Comptroller of Currency, 55 percent of all loan modifications performed in early 2008 were back in default (at least 30 days past due) within six months of the modification. A full third were at least 60 days delinquent. Not very good odds, is it?

Part of the problem, according to credit counselors, is that many loan modifications aren't very well designed for long-term success. Lenders may offer new terms that give the homeowner an opportunity to get current on their loan, but with payment schedules that leave the debtor with little margin for error. Often, a loan modification doesn't even reduce a homeowner's monthly mortgage payments - in fact, it may even increase them. Though some banks will modify a loan by simply tacking the past due balance, or arrearage, onto the end of the loan, others will simply pile it on top of the current monthly payments as a series of additional payments over the coming months or years.

Of course, if you've been having trouble making your mortgage payments already, trying to make a higher monthly payment could be well-nigh impossible, unless the reason for default is a temporary financial setback that has now passed, such as an illness or layoff that kept you from working.

Not all loan mods are set in stone

If you're applying for a government-backed Making Home Affordable loan modification, most of the terms, including a reduced monthly payment, are mandated by the program rules. But if you're working out a private modification directly with your lender, there're several things that improve the chances that your loan modification will be a long-term success, and not simply delay foreclosure for a while longer. Among them:

Don't automatically accept the first set of terms your lender offers. Some people are so desperate to avoid foreclosure, they get in a panic mode and jump at the first thing their bank or loan servicer offers, said Rich Korn, a certified foreclosure intervention counselor with Consumer Counseling Credit Services in Columbus, Ohio. Often, mortgage holders can get better terms if they come back with a counteroffer.

Work with a certified credit counselor. A credit counselor with a HUD-endorsed or other certified nonprofit credit counseling service can be a big help in working out a loan negotiation with your lender. Not only do they know and routinely work with the people in a position to authorize loan modifications at various lenders, they also tend to have a pretty good idea of what sort of terms you can get and can help you in preparing counterproposals to offer your lender. They can also assist you in going over your finances to help you identity what sort of monthly payment you'll need to be able to maintain your mortgage payments on a long-term basis.

Also, make sure that you're working with a certified credit counselor and not a so-called mortgage rescue service that charges large fees up front for their services and frequently fail to deliver. If you're asked to pay a large fee in advance, look elsewhere.

Seek a lower monthly payment. This may seem obvious advice, but the majority of loan modifications actually either increase the debtors monthly payment or leave it unchanged. Both are far more likely to end up with a redefault than a loan mod that lowers your monthly payment. According to the U.S. Office of the Comptroller of Currency (OCC), reducing monthly payments by 10 percent or more cuts the likelihood of a new default over the next six months in half.

You won't have to worry about this if you're getting a Making Home Affordable loan modification backed by the federal government, because that program requires reducing monthly mortgage payments to 31 percent of the homeowner's monthly income. But if you're working out a private loan modification with your lender, you may have to push them to restructure the loan so that you get at least a temporary reduction. This is one place where a credit counselor can be of assistance.

Act early. The OCC reports that loan modification success rates are linked to how soon homeowners obtain a loan mod after getting into financial trouble. Homeowners who plan ahead and are able to obtain a loan modification before defaulting on their mortgage payments are 12 percent less likely to default than those who obtain loan modifications after missing two mortgage payments, who in turn are less likely to default than those who've missed three or more.

Some breathing room. One thing that can make a big difference is to negotiate a delay of one or two months before resuming mortgage payments, with the missed payments tacked on to the end of the loan. What this does, according to Korn, is enable the borrower to address some other late debts and possibly build up a bit of a reserve for handling unexpected expenses that inevitably crop up.

Account for your entire financial picture. Homeowners often fail to account for all the expenses they need to meet when figuring out what sort of modified mortgage payment they can afford. Unexpected car repairs and medical bills, infrequent but regular expenses such as back-to-school purchases and insurance premiums, all can eventually derail a loan modification payment schedule.

Your mortgage is held by your loan servicer. Most mortgages are packaged and resold on the secondary market to investors, and your loan servicer merely processes your payments and manages the loan. But if you're lucky enough to be among the small percentage whose mortgage is still held by the original lender or by your servicer itself, you have a 70 percent greater chance of staying out of default six months after your loan modification, according to the OCC.

Apparently, servicers have more flexibility in modifying loans held on their own books than they do on loans owned by others, in which they're often restricted by contractual obligations. There's nothing you can do to change this one, but if you do have a mortgage held by your servicer, it's a good thing to know going in.

Remember, if your loan modification isn't going to work out over the long-term, it's really not doing you any favors. In fact, a poorly designed loan modification could cause you to continue pouring money into a property you eventually won't be able to retain, money that would be better used getting back on your feet in a rental home. But if you can demonstrate to your lender that a well-designed loan mod will significantly increase the likelihood that you'll be able to keep up with your payments, you'll both be better off in the long run.

Published on August 21, 2009