Bank mortgage portfolios continue to fill with homeowners in payment default. Meanwhile, housing inventories swell with foreclosures. The economy is in one of its worst downturns in decades and chances are it is affecting you.

There is a good possibility that you may be one of these negative housing statistics, or will be in the near future. The good news is that banks, mortgage lenders, and servicers have never been more willing to help you avoid foreclosure.

Loan modifications are becoming the new mortgage refinance. With an increasing number of homes sinking into double-digit depreciation and many mortgages upside-down, most homeowners lack the necessary home equity to complete a traditional mortgage refinance.

Loan modifications are just as the term implies, a renegotiation or modification of your existing loan. Unlike traditional mortgage refinance you are not getting a new mortgage. In the loan modification process you are simple modifying the terms of your existing agreement.

Most major banks, as well as government controlled entities like Fannie Mae and Freddie Mac have adopted generous guidelines to renegotiate troubled mortgages. Generally, these loan modifications were targeted at borrowers that had already become past-due. However, the deepening mortgage crisis is making these options available to an ever expanding group of borrowers.

So, why might you consider a loan modification? There are certainly a variety of reasons you might qualify for or simply consider a loan modification.

Here are a few of the most compelling reasons to renegotiate your mortgage:

  • You have missed a mortgage payment
  • Your mortgage rate or payment is set to adjust
  • Your home has lost a significant amount of value
  • Your income has been negatively impacted
  • One or more household earners has lost a jo
  • Your mortgage payment exceeds 37 percent of your income

Note that missing a mortgage payment is no longer a pre-condition to considering renegotiating your mortgage. If your financial circumstances have changed, start talking to your lender about modifying your mortgage.

Anytime there is despair in the market it is time to be cautious. Those seeking a loan modification should heed this warning. Loan modification scams and rip-offs are proliferating in this troubled market. So, carefully follow some simple steps to manage your search for a loan modification.

Start with your mortgage statement. Your mortgage servicer is ultimately the only organization that can modify your mortgage loan. That is why you should call them first. This will help you understand your specific options with the lender with which you have a mortgage contract.

The next step is to gather up complete documentation of your income and expenses. A simple calculation of your debt to income ratio will give you a good indication if your "hardship" will be considered by your servicer. If your debt exceeds 37 percent of your income, most lenders will consider your request to modify you loan.

With this basic information call your servicer--this is the name and telephone number on your loan statement. They will most likely request a "hardship letter" and all of the documentation you just collected (i.e., W-2's, 1099's, bank statements, and mortgage statements), estimates of debts and expenses, and some estimation of your home value.

This will kick off your loan modification process. This process will be long and frustrating. There are millions of homeowners in your same situation. This is causing an immense queue of homeowners. Therefore, make sure that you keeping calling and following up on your inquiry. This is the only way to get it done.

There will be fees involved in completing your loan modification, but careful scrutinize every item. You can reasonably expect your lender to request a "Good Faith Payment" and fees related to attorney and processing fees. You may also be asked to "impound" insurance and back property taxes.

The most important consideration in accepting any loan modification is can you afford the new payment. It is amazing how many early renegotiations of mortgages had borrowers accepting higher payments. Your new mortgage, by extending the term, lowering the mortgage rate, or reducing principle should make your payment more affordable.

Published on March 9, 2009