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You may have heard about mortgage loan modifications, both for good and bad reasons. Mortgage modifications can be a cost effective way for a borrower facing economic hardship to resolve current or potential delinquencies. However, many unscrupulous lenders have taken advantage of homeowners in their time of need and charged exorbitant up-front fees with unfulfilled promises of mortgage relief. Fortunately, there is a system available that provides the borrower with the benefits of a modification without any up-front fees.

Let’s start with the basics. A mortgage modification is an agreement with your current mortgage lender to amend the terms of the mortgage. This may mean reducing the interest rate on the mortgage, extending the term of the loan, converting it from a fixed to an adjustable rate, or restructuring the loan. While many borrowers may not qualify to refinance their mortgage traditionally due to negative equity, unstable income or employment, or a poor payment history, a modification can achieve the same goals without the normal qualifying criteria. Furthermore, a modification can be very cost effective as it does not require many of the third party fees involved in a traditional refinance.

Earlier this year, the Obama Administration introduced the “Making Home Affordable” program which included a variety of initiatives aimed at helping homeowners in need avoid foreclosure. Included in this initiative was a modification program but only certain loan qualify. To be eligible for this program, your loan must be a conventional loan originated prior to January 1, 2009, and it must be your primary residence. It also must be serviced by a participating lender. Currently, there are 69 lenders participating in the program representing roughly 75% of all conventional loans, so most mortgages originated over the past several years should qualify. If you have a government loan such as an FHA or VA loan, you can also pursue a modification, but the rules are slightly different. For example, with an FHA loan, you must be behind on your payments by at least 60 days before a modification request will be considered. Under “Making Home Affordable”, there is no requirement that you be past due.

All is not lost for loans that fail the test for qualifying under the “Making Home Affordable”. Your mortgage may still be eligible for modification outside of the government sponsored program if you can demonstrate imminent default, limited assets, and negative cash flow each month.

There are two ways to pursue a mortgage modification. You can contact your lender directly and see if you qualify, but beware, you will likely be working with the bank’s collection department and anything you say and do during the process can be used to collect from you. It might prove more beneficial to work with a mortgage lender that provides these services. They can then act as your advocate in the negotiation process. Be sure to look for a lender that does not charge any up-front fees and that has experience in working with these programs. You should also make sure your lender is accredited by the Better Business Bureau and has a clean track record with your state’s regulatory agency.

The costs involved in a mortgage modification are similar to what you might pay a lender to refinance your mortgage where you would be paying origination fees and other closing costs. In our experience, $2500 - $5000 would represent a reasonable expense depending on the size of your loan.