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The term "loan modification," virtually unheard of before the foreclosure crisis, has elbowed its way into conversations all over America. Millions of homeowners are being inundated with postcards, emails and phone calls offering loan modification services. Millions more are going the DIY route, attempting to negotiate a "loan mod" for themselves directly with their lender. The reality is, most homeowners are not even clear on exactly what loan modification is! This confusion, combined with financial anxiety and fears of foreclosure can cause panic, paralysis and poor decision-making. In order to make smart decisions when it comes to modifying your mortgage, you must first understand what loan modification is, how the process works, and what outcomes you can expect.

Demystifying Loan Modification

In short, a loan modification is an agreement between a lender and a borrower to change one or more terms of the mortgage. The most commonly modified mortgage terms include:

• the length of the loan (e.g., extending a 30-year mortgage to a 40-year mortgage);
• the interest rate (e.g., reducing a 7 percent rate to 6 percent);
• the variability of the rate and payment (e.g., converting an adjustable rate mortgage [ARM] to a fixed-rate mortgage); and
• late payments (e.g., reinstating a past due loan and deferring missed payments to the end of the loan).

The loan modification process varies from lender to lender, but generally involves several steps:

1. The borrower contacts the lender's loss mitigation department to initiate the application process.
2. The borrower provides the lender with income, expense and asset information and documentation.
3. The borrower submits a hardship letter detailing why the borrower is facing mortgage and financial distress, and why they will be able to get and stay current on the mortgage, if modified.
4. The lender considers all of this information and makes a decision about whether to modify the mortgage, and which terms to modify.

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