Recent legislation like the Emergency Mortgage Loan Modification Act of 2008 and programs through the Department of Housing and Urban Development (HUD) and The Federal Housing Administration (FHA) have provided a way out for mortgagees who find themselves struggling with loan payments or with loans that are worth more than their homes.

Mortgage modification is the best option if you are falling behind on your payments or if you can't manage to swing refinancing at an affordable rate. Lenders have powerful incentives to work out modifications to your loan under the new programs. If you have a second mortgage, your bank may be even more motivated since second mortgages frequently get little or nothing in foreclosure sales. A loan modification may be better than nothing for your second lender.

Step 1:

Contact your mortgage loan officer as soon as possible. Some lenders will not take you seriously till you've missed a payment or two, but in the current economy, many will be more accommodating. Your loan officer may want to discuss the possibility of refinancing your mortgage if you're still making your payments. If your loan is underwater, however, or you can't improve your situation with a refinance, mortgage loan modification may be your best way out.

Step 2:

Discuss the options you have through your mortgage lender. If you have an FHA loan, the FHA has several programs available. The FHA program requires that this be your first FHA mortgage and that you've had the loan for more than 12 months. Your total mortgage payment is more than 31% of your income. HUD offers programs like the Home Affordable Modification Program (HAMP) for FHA, VA and RHS guaranteed loans. HUD has other programs like the Principle Reduction Alternative (PRA) and the Home Affordable Refinance Program (HARP) program to help homeowners whose house is worth less than they owe. The Second Lien Modification Program (2MP) can reduce payments on second liens. Request copies of any application forms you will need from your banker along with a list of the documentation you will need.

Step 3:

Review the documents list in your packet and collect the information you need to present. You will, of course need 1 to 3 year's tax returns depending on the requirements of the loan modification program. Next, document of all your expenses. Then, prepare a budget showing how lowering your mortgage payment will allow you to successfully pay back the loan the bank originally gave you. An attorney that specializes in mortgage modification may be worth the expense as you put your case for loan modification together. The better you make your case, the easier it will be for your mortgage loan officer to qualify you for the program.

Step 4:

Get copies of all three of your credit reports to include with your documentation. You will want to make sure your credit score is accurate and matches what your lender is looking at. The decision to approve or disapprove your loan modification program may depend on whether your lender is looking at accurate credit data about you.

Step 5:

Prepare a formal hardship letter presenting your case for mortgage loan modification eligibility. In the hardship letter you will explain the reasons for your financial problems and explain why a loan modification will help you ride out your financial crisis for the long term. List any attempts you've made to meet your loan payments, to sell your home, etc.

Step 6:

Submit your hardship letter, application and documentation to your lender. Keep making payments as best you can during the approval process. It can take up to 30 days for you to receive approval for a loan modification plan.

Photo courtesy of Casey Serin