Unless you are seeking loan modification through the government sponsored Making Home Affordable program, which is governed by strict guidelines, most mortgage loan modification negotiations are based on the willing participation and agreement of both the borrower and the lender. In the current economic climate it is usually in the lender’s best interest to work with borrowers facing economic hardship and, more often than not, most lenders will work with the borrowers to make loan modifications that serve the best interests of both parties. However, there is a growing trend out there, especially online, of people offering comprehensive mortgage audits to find legal violations in the original mortgage agreement with the implication that if a problem is found, borrowers then the have leverage to force lenders into negotiation and accepting terms they would otherwise not accept.

Contrary to the claims made by many of the people selling these services, the reality is quite different and attempting to force the lender into loan modification arrangements is almost guaranteed to backfire and result in a disaster for the borrowers. A mortgage audit is a comprehensive, line by line review of the loan documentation searching for clauses that violate the law. In many cases, auditors do find violations of either the Real Estate Settlement Procedures Act (RESPA) or Truth in Lending Act (TILA). However, these violations do not provide the leverage that the companies selling audits imply that they do. Even though many loan agreements contain violations, in order to act on these violations, the borrower has to sue the lender in court. Since the lenders have a vested interest in discouraging this practice, in virtually all cases the lenders bring in the big attorneys and drag the case out indefinitely, while the borrower has to pay ever mounting legal expenses to keep the case moving forward.

As a general rule of thumb, if a borrower is facing sincere economic hardship and can document this, the lender will be willing to negotiate for a loan modification that both parties can live with. However, efforts to coerce or force a lender into negotiation and to dictate terms will almost always result in the lender dropping any willingness to work with the borrower and to actively go after that borrower for any violation of the terms of the loan. Trying to threaten a lender with a lawsuit based on a mortgage audit essentially amounts to an active effort to default on the loan as far as the lender is concerned and at that point any pretense to good will evaporates. Further, most people that have the money to finance years of litigation plainly are not facing a serious economic hardship that would justify loan modification anyway. Therefore, such threats are seen as either empty – if the borrower is facing real financial hardship – or malicious, if the borrower is not.

A basic audit mortgage usually sells for around $500, but as discussed above this is only the first – and one of the smaller – expenses related to trying to act on any problems discovered through the audit. The only time that a detailed mortgage audit really makes sense is if the lender has already refused to accept any negotiation and has already brought the borrower to court through a foreclosure suit or by other means. In this case, an audit may help to strengthen the borrower’s hand; but it only makes sense to invest in this service once there is nothing else to lose.

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The basic idea of loan modification is simply changing the terms originally agreed upon and this can apply to any kind of loan. However, in the current climate, when people are talking about loan modification they mean efforts to modify mortgage loans in order to avoid foreclosure. The basic idea is to make the borrower’s monthly mortgage payments more reasonable by lowering the amount. This can be accomplished in several different ways and in the present economic mess is frequently in the interests of both parties: the borrower and the lender. Therefore it can come as no surprise that loan modification has received a lot of attention over the last year or so.

For the borrower, the advantage is self evident: it lowers the amount due each month making it easier to maintain regular timely loan payments. Since the collapse of the real estate market, many people have found themselves locked into mortgages that are for far more than the actual property is worth. Further, the general economic slow down has resulted in many people losing their jobs, alternative streams of income, or facing other economic hardships, making their monthly mortgage payment all the more difficult. Nevertheless, most people that have purchased home recently tend to believe that the value of their property will rebound at some point and want to stay in their homes.

For the lender, the advantage of loan modification is that it can serve as a preferable alternative to foreclosure. Depending on the condition of the local real estate market, foreclosure can frequently lead to significantly larger losses than working with the borrower to ease the terms of the initial loan. In these cases, which are much more common since late 2008 and will remain common throughout 2010, the lender will often agree to some form of loan modification as long as the tangible benefit outweighs that of foreclosing on the property. With most real estate markets having bottomed out but not rising, an over abundance of houses available, and a steep decline in the number of people who qualify for new mortgages; keeping older mortgages alive – even if modified – is a good idea for many lenders.

The exact mechanics of available modification schemes differ based on the lender’s policies and practices as well as the general financial situation of both the borrower and the lender. Typically the lenders prefer loan modification programs that do not result in the overall amount owed decreasing, like extending the length of the loan or accepting a mortgage forbearance agreement. However, if the local real estate market is in bad shape and the lender is as well, a good negotiator may be able to convince the lender into actually reducing the amount owed, by reducing the interest rate or even the principal of the loan. There are other options as well, such as either waiving or stopping late fees and penalties or changing the interest calculations.

In general, loan modification is the product of negotiation between the lender and the borrower, usually initiated by the borrower. The exception to this is the federal government’s Home Affordable Modification Program (HAMP), which borrowers can learn about online at http://makinghomeaffordable.gov/.

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Any borrower can approach their lender at any time to initiate negotiations for loan modifications and generally speaking most lenders have a series of programs available. More often than not the terms can be realized if the borrower initiates negotiations before he or she fall behind in their payments, though there is nothing preventing a borrower from suggesting loan modification after they are already delinquent, or even after foreclosure or bankruptcy proceedings have begun. However, in order to qualify for loan modification under the federal government’s Home Affordable Modification Program (HAMP), there are five specific conditions that must be met.

First, the home in question has to be the borrower’s primary residence, meaning that people cannot appeal to HAMP to stop foreclosure on secondary homes, rental properties, or vacation homes. Second, the amount owed on the primary mortgage – the one the borrower is seeking to modify – has to be $729,750 or less. Third, the current mortgage has to have been obtained prior to January 1, 2009, so people with more recent mortgages do not qualify for assistance under HAMP though other options may be available.

The fourth qualification for loan modification under HAMP is that the borrower has to be having trouble paying their mortgage. This is more than merely saying so; instead the borrower has to substantiate this claim. The claimed difficulties have to be listed on the Request for Modification and Affidavit (RMA) form that initiates the HAMP process. While the RMA itself instructs borrowers not to provide lengthy explanations, once this material is sent to the lender, the lender will investigate thoroughly and expect the borrower to substantiate their claims of economic hardship. The entire process may be stopped and rejected if the borrower is not really suffering hardship.

The fifth, and final, qualification for loan modification under HAMP is that the borrower monthly mortgage payment has to be in excess of thirty-one percent of their current monthly gross income. It is important to note that this refers to gross income (the total amount made before expenses) not net income (the total amount actually brought home each month). Further, as is the case with the fourth qualification, all of this has to be substantiated. The borrower will have to provide the lender with not only comprehensive proof of all income, but also their last tax return and other documentation.

If a borrower meets all five of the conditions described above, they may qualify for loan modification under HAMP. However, unlike independent loan modification, in which the borrower and lender sit down together and thresh out an agreement, the HAMP program is structured. That is, there is a very specific process that the lender and borrower must follow in order to reach loan modification agreement that the program will fund. If the borrower has a stable income and just needs some temporary relief, he or she may be able to get a better deal through direct negotiation as opposed to using HAMP. A savvy borrower may want to consider free negotiation first and using the HAMP option as a contingency plan if the free negotiation fails.

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