Try a Loan Modification

If you can't afford your monthly mortgage payment and you can't refinance, a loan modification may keep you in your home.

The Making Home Affordable program, announced by the Obama administration in March, aims to reduce borrowers' monthly payments to no more than 31% of their pretax income.

However, only homeowners in very specific circumstances qualify. Candidates must live in their homes. They can already be behind in their payments or they must prove that they stand at the threshold of default because of financial hardship. The balance of their first mortgage can't exceed $729,750, and they must make their new payment for a three-month trial period in order to qualify.

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For those who qualify, though, the savings can be dramatic. Say a homeowner has a $320,000 mortgage but can't make the monthly payment of $2,023 (excluding taxes and insurance). Home Affordable could cut the payment to $1,254, with an interest rate of 2%.

And there's an additional benefit: Although the program lasts for just five years, in each of those years the loan principal is reduced by $1,000 -- as long as the homeowner stays current on the payments. After the five years are up, the lender will increase the interest rate by one percentage point a year until it reaches the prevailing rate. (For details, visit www.makinghomeaffordable.gov.)

Homeowners who qualify must also deal with a lender that's both in the program and willing to help. (Lenders get financial incentives from the government to participate.) Participation is voluntary but you can probably expect that lenders or loan servicers that handle loans owned or guaranteed by Freddie Mac or Fannie Mae will participate. By early May, 14 lenders had formally announced their participation in the program; their names and phone numbers are listed on the Making Home Affordable Web site. The extent to which these lenders will offer loan modifications remains to be seen.

If you need a loan mod, don't wait for your lender to take action. Contact your lender and ask for the loss-mitigation or home-retention department. If you get the runaround, seek help elsewhere. Consumer advocate Ralph Roberts, in Detroit (www.keepmyhouse.com), advises clients to hire an advocate. A good option is to call a HUD-certified housing counselor for free help (call the Hope Now hotline at 888-995-4673 or visit www.hopenow.com). Roberts also warns that loan-modification assistance is the new gold rush and that scams abound (see Scams Exploit Hard Times).

You may want to hire an experienced real estate lawyer to negotiate on your behalf. The lawyer should also review your original loan documents for signs that you were a victim of mortgage fraud. If that proves to be the case, you should gain additional leverage over the lender, regardless of whether it's participating in the Obama plan. The leverage will help you modify or replace your loan, as well as forestall foreclosure. If paying legal fees is an issue, seek help from a legal-aid society or from lawyers doing pro-bono work.