Living Frugal
Can a Loan Modification Help Save Your Home

A loan modification is a change in one or more of the terms of your loan. It allows the loan to be reinstated and will result in a mortgage payment that you can afford. The loan is adjusted either by lowering the interest rate, increasing the loan duration or other factors. The desired end result in the loan modification is a mortgage payment you can afford and it keeps your home out of foreclosure.

If you are one of the many people who are struggling to make ends meet in the bad economy, a loan modification may help you save your home.

In the past, you could only get a loan modification if you were behind on your payments. That's not true anymore. Find out if you are eligible and try to save the home you have worked so hard for. Don't just give up and walk away from your home.

Am I eligible?

  • If your monthly mortgage payment exceeds more than 31 percent of your gross income, you may be eligible. Remember, your payment includes real estate taxes, home owners association fees and home owners insurance.
  • If your total debt (including credit cards) exceeds 55 percent of your gross income, you'll be required to work with a counselor who is approved by HUD. If this is your case, a loan modification will not be considered until you promise to get counseling (by signing documentation stating such).
  • Also, if you are underwater on your mortgage, you may also be eligible if you meet the following:
  • Your mortgage is owned or guaranteed by Freddie Mac or Fannie Mae.
  • Your mortgage must have been sold to either Freddie Mac or Fannie Mae on or before 5/31/2009.
  • You have not refinanced your mortgage under the HARP program unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
  • The current loan to value ratio is greater than 80%.
  • You must be current on your mortgage payments and have a good payment history for the last 12 months.

Do I need help with the loan modification process?

  • It's not a bad idea to have someone help you but if you are somewhat knowledgeable about the process, you could tackle it yourself.
  • If you're uncertain, look for a HUD approved counseling agency that doesn't charge for it's services and has experience with loan modifications. You should never pay for loan modification services. 
  • There is no charge to work with a HUD approved counseling agency. Get started by going to

Find out who owns your loan

  • Call your mortgage lender to find out who owns your loan. The information is located on your mortgage statement. You can also try finding your mortgage servicer by going to the Freddie Mac or Fannie Mae websites. 
  • Most likely your mortgage servicer participates in the Making Home Affordable program. It is totally voluntary on the lender's part but the government offers incentives for them to participate in the program.

I personally used the Making Home Affordable program to refinance my house that was underwater. They reduced my interest rate and extended the term of the loan to bring my payment down a significant amount.


During the application process, you'll have to disclose financial information that you may not be proud of. However, you need to be 100% honest in all your dealings with the lender. Give the lender the required documentation so that the process goes smoothly. Anything other than honesty will come back to bite you.


Before contacting your mortgage servicer, have the following documents ready for the application process. (See the Making Home Affordable Website)

  • Recent pay stubs that indicate the monthly gross income of your household (before tax). Documentation about any additional sources of income (spousal support, retirement checks, stock dividends).
  • The most recent income tax return.
  • Information about all assets (cars, savings accounts, mutual funds...etc)
  • Your monthly mortgage statement along with the home equity line of credit information.
  • Information about any second mortgages on the home. 
  • NOTE - The making home affordable program is only to modify a first mortgage. A second is not included.
  • Credit card account balances along with minimum monthly payments.Student or car loan account balances and any other outstanding debts you may have.

The Hardship Letter

A hardship letter is very important when applying for a loan modification. The hardship letter should detail your current situation and an explanation as to why your income has been reduced or what caused your expenses to increase (job loss, medical bills).

Make sure the hardship letter is very specific as to how you got here and why. Don't write a sob story but be very up front and specific. The lender needs to understand from your hardship letter why you're in trouble and you are seeking to stay out of foreclosure proceedings.

The Loan Modification Process

  • After contacting your lender, the lender will review numbers and then present you with an offer on a monthly payment that gets them the most money possible.
  • Granted, it may be something you can afford but just barely.
  • Don't take the first offer out of wanting to get it over with. Absolutely do not agree to something you can't afford. You only have one shot at this. You can't ask for a loan modification again.
  • Provide the lender your budget that shows them how their offer will leave you in a bind.
  • Let the lender know the monthly payment that will work for you and not a penny more.
  • Make it clear the only other option is foreclosure and you're not opposed to letting them have another one.
  • They have plenty and don't want yours if they can keep you paying your monthly payments.
  • Foreclosure is extremely expensive for lenders. I'm not saying to be deceptive or bluff, but the only one that can negotiate for you is you. You have to fight for you.

The bank won't cooperate

If your lender just refuses to cooperate, don't hesitate to contact your congressman. The lender took tax payer dollars in bailout money and should be willing to help you. 

Now, I wouldn't do this in the beginning but if you are getting poor service or no response, contacting a politician is to your advantage.

Be very clear with your lender that you will be getting a member of congress involved for their assistance.

Document, Document, Document

Every time you have any sort of correspondence with your lender, write it down. If you are providing documentation to them, use FedEx or certified mail where it has to be signed for upon receipt.

The reason you need documentation is just in case things fall through and your home goes into foreclosure. You have the necessary documentation that proves you tried to find a solution to your mortgage crisis, but the lender would not cooperate.

Follow up, Follow up, Follow up

Remember, the squeaky wheel always gets the grease. I recommend following up at least once a week with the lender to see where things stand. This could be the only thing that keeps the process moving.

The lenders are busy too and a phone call keeps your file on top of the stack, instead of letting it drift to the bottom.

Beware of scams

Absolutely do not pay any upfront fees or disclose any bank account information to anyone besides your lender or bank. Anyone else asking for this information is likely working a scam.

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