Considering a home loan modification?

Homeowners worried about missing mortgage payments and entering foreclosure may have another option: a loan modification.

Despite some signs of stability in the housing market, foreclosures remain a major obstacle to a meaningful recovery. And more borrowers in good standing are likely to miss their mortgage payments as the recession claims more jobs.

That's why some people have gone for a loan modification - a permanent change in a mortgage that results in more affordable payments for the borrower.

Efforts to modify home loans have been easily outpaced by the number of new delinquencies, according to a Treasury Department report released in late June. In the first quarter, loan companies modified 185,156 mortgages, up 55 percent from the previous quarter, while the number of foreclosures in process increased to 844,389, up 22 percent.

Still, modification has been an option for many troubled homeowners. Lenders have been overwhelmed by calls from people seeking to modify their home loan, leading to reports of frustration and delays, according to mortgage finance giant Freddie Mac, which recently released an Internet video discussing this topic.

In the face of these delays, it's important to start the loan modification process fully prepared. That means having the correct paperwork handy before calling or meeting with a loan servicer or housing counselor.

Here are some questions and answers about what you should have on hand.

Q: What are some basic documents to gather ahead of a loan modification meeting?

A: First, the servicer will want to quickly find the file in question, so have the monthly mortgage statement in hand.

Next, find the most recent statement for any homeowners' or condominium association fees. Some borrowers have seen association fees increase in light of more home vacancies brought on by foreclosures, stressing monthly budgets - so you'll want evidence of what you've been paying each month.

Also, borrowers who took out home equity lines of credit, and second or third mortgages, should have paperwork for those loans handy.

All of these documents go a long way in displaying a troubled borrower's financial situation and determining their eligibility for a loan modification. Borrowers should also enter the process with a budget plan that includes how much they can actually afford to pay in monthly housing expenses, including insurance and taxes.

Q: How about tax documents?

A: In addition to recent job payroll stubs, borrowers should have their W-2 and their 2008 tax return handy. Property taxes can't be ignored when considering monthly and yearly housing costs, so borrowers should have their property tax bill as well.

If a borrower is self-employed, he or she should have a profit-and-loss statement to reference.

All this allows the loan servicer to more quickly determine a household's pretax income and a reasonable new monthly mortgage payment, according to Freddie Mac.

Q: Are there any documents not specifically related to the home that should be nearby during the meeting with the loan servicer?

A: Sure. Bring along statements showing balances and minimum monthly payments on active credit cards, car loans, student loans and other debts or obligations, Freddie Mac says.

These documents give the servicer a sense of the borrower's monthly expenses outside of home-related expenditures, to come up with a manageable monthly mortgage payment that will be sustainable.

Q: Is that all?

A: Actually, no. Freddie Mac recommends that homeowners write a statement that discusses the financial problems that are or could be leading to foreclosure.

This should be an honest account - the writer should set pride aside and give the servicer a sense of how bad the situation really is.

Loan modification can be a complicated process, involving complex contracts and agreements. Borrowers might want to have a lawyer guide them through the process to work through any technicalities and make sure the lender is taking the correct steps.

Q: What are some dangers to watch for in the loan modification process?

A: A significant problem is mortgage-reduction scams, in which consultants market their services directly to the consumer and ask for an upfront fee, often with a promise to rescue the borrower from foreclosure by negotiating with the lender on the borrower's behalf. These fees can be in the hundreds or thousands of dollars.

Sometimes, however, the work is never done, and the fee is not returned.

Government agencies have been cracking down. On Wednesday, state and federal prosecutors said they filed 189 lawsuits as part of a nationwide sweep targeting loan modification consultants accused of bilking homeowners.

The federal government has outlined some fraud warning signs: For starters, borrowers should be wary of aggressive marketing tactics, requests for upfront fees and guarantees of foreclosure rescue. Consumers also should not sign any documents without reading them carefully.

Other things to watch out for, according to the Treasury Department: offers to buy the house and then rent it back to the homeowner, instructions to the homeowner not to contact the lender and false claims of government affiliation.