1.8 million homes were foreclosed in 2008. Millions of homeowners are expected to enter into foreclosure in 2009 and 2010. Rather than face foreclosure and suffer an eviction from your home, is there anything you can do to prevent the situation from escalating?



Indeed, there is! You can ask to change the terms of your mortgage. Mortgage lenders are not in the business of repossessing and re-selling homes. The cost of foreclosure with attorney's fees and lost income is just too much for a lender's bottom line. It is in the lender's best interest to change the mortgage terms so that they continue to earn interest from your home purchase.

Step One: Open Communications with Your Lender

The first step is to call your loan servicer and discuss your current financial situation. If you have experienced a drop in income, or other bills have piled on so that your current mortgage payment is not sustainable, let them know that you would like to discuss a loan modification.

Typically, a lender will require you to go through another underwriting process where they will evaluate your situation. They will ask for your income verification and IRS tax filings. The lender will pull a credit history report, as well as require a home appraisal usually at your cost. If you want to ask for a loan modification, be sure to have all possible paperwork and documentation at the ready. Even after submitting copies of your paperwork, it is likely that the underwriter will ask for additional documentation. The faster you can respond to these requests, the quicker he will be able to make a decision.

Step Two: What Factors the Lender Considers

The loan modification underwriter must determine whether changing your loan terms will still meet the lender's investment objectives and parameters. They will check to see if your debt to income ratio has changed, and if so, whether a new, lower interest rate will help lower a mortgage payment to one more affordable to you. Sometime a lower interest rate does not fit with their loan parameters. However, even if the new loan terms are not within the typical parameters of their loan objectives, remember that a possible alternative is foreclosure. Mortgage companies will take that into special consideration if they want to avoid foreclosing.

Step Three: The Payment Reduction Scenarios

If you are granted a loan modification to lower monthly payments, it may occur through several possibilities. The best situation (but worst for the lender) is that they could lower your interest rate. This would help lower your monthly payments by hundreds of dollars.

If you have paid a considerable amount down from your principal balance, they may just extend the current term and re-amortize. For instance, if you had a $200,000, 30-yr mortgage with an interest rate of 7%, your monthly payment is $1331. If your balance was down to $175,000, you could extend your mortgage to another 30 years and lower your payment to $1164. That's a savings of $167 per month, and it could be even lower if the interest rate is reduced as well.

Another possibility is that the mortgage company may extend forbearance on your mortgage payment for a limited time. With forbearance, you are not required to make monthly payments for a period of time; however, interest will still accrue and be added onto the principal balance. Though you could end up paying more for this type of modification in the end, it could certainly save you from entering foreclosure in a time of financial crisis.

How Long the Process Takes

If your lender is willing to listen and re-negotiate your mortgage, and you have the required paperwork ready, you could have a decision within a matter of weeks. If there are delays due to needed documentation, or required fixes found from a home appraisal and inspection, you may have to wait a month or two until everything has been approved to the lender's satisfaction. The best strategy is to be flexible and agree to meet the demands of the lender.

This article is intended for general information. Always seek sound financial and legal advice before making any financial decision.