You’ve probably seen television advertising loan modification helplines — there’s no shortage of companies claiming they can help you modify your loan and avoid foreclosure.

The good news is, loan modifications really can help you get back on track, at least under the right circumstances. The bad news is, the ads on television are for companies that usually charge fees – sometimes hundreds of dollars – for what you can accomplish on your own.

Really, the first step toward getting a loan modification is calling your mortgage lender. It sounds obvious, sure, but these ads wouldn’t exist if people didn’t miss that very simple point.

Most mortgage lenders offer loan modifications, typically through the Making Home Affordable program created by the United States government. The Federal government pays lenders when a borrower completes a modification, so they have an incentive to provide this service to borrowers (in addition to avoiding the costs of foreclosing on and selling a borrower’s home).

Anyway…

What is a Loan Modification?

Simply put, a loan modification is a plan that lowers your monthly mortgage payments to an “affordable” level. I put “affordable” in quotes because what you consider affordable and the next reader considers affordable are probably two different things. Let’s just say that the main goal of a loan modification is to bring your monthly payment down to about 31% of your income.

There are several ways a lender can accomplish this:

• Lower your interest rate
• Lengthen the term of your loan
• Forgive or forebear part of the principal, late fees, etc.

It usually also puts all foreclosure activity on hold.

Notice I didn’t say it “ends” foreclosure activity. Here’s the kicker – once your lender has put you into a loan modification program, you’ll have to complete a three-month trial run (4 months if you’re not currently in default, but anticipate going into default). You will absolutely have to make three payments (at the reduced amount) before the end of the three-month period. If you don’t, the modification goes out the window, and the lender can move forward with foreclosure proceedings quite swiftly.

Now, if you complete trial period successfully, your lender can make the modification permanent. That means that as long as you keep up your payments, you won’t have to worry about your house going up on the auction block. Also, the lender will usually absorb past due amounts into the loan balance, so your mortgage loan will be reported as current to the credit bureaus.

Next time, we’ll look at qualifying for a loan modification.We’ll also look at writing a hardship letter for a loan modification, which can be one of the most frustrating pieces of the puzzle.

Cheers,

Mike