11 essential loan-modification tips (© DCA Productions/Getty Images)

If you're one of the many Americans who are staggering under the anvil weight of your mortgage, two words may yet save you: loan modification.

Simply put, a loan modification is a retooling of your home loan – by adjusting the interest rate, the loan's duration or other factors – until it's low enough each month that you can afford to pay it.

"There are as many as 5 million homeowners who are struggling with their payments, who are 30 days, 60 days, 90 days behind," says Ralph Roberts, author of the blog KeepMyHouse.com and the book "Protect Yourself From Real Estate and Mortgage Fraud." (Another of his books, "Loan Modification for Dummies," will be published this summer.) "Lots of people need loan modifications." 

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Past loan modifications have often simply delayed the pain; homeowners' new loans weren't good enough and they soon found themselves in trouble again (read "6 reasons modified loans are going bad").The Obama administration is trying to fix that with its Making Home Affordable modification program, which focuses on home modifications and refinances.

But how do you ensure that you get the most favorable terms you can, so that you can stay in your home?  Should you tackle it yourself or get professional help? The following 11 tips and strategies can put your mind at ease and keep your home off the auction block:

1. Start now: Not so long ago, loan modification was an option reserved only for homeowners who were in default – that is, when their lender filed a motion to start the foreclosure process, usually after 90 days of late payments. No more, says Jack Guttentag, a professor emeritus of finance at the University of Pennsylvania who runs the Mortgage Professor Web site.

Now, homeowners are receiving help before they go into default, says Moe Bedard, founder of LoanSafe.org and president of Loan Safe Solutions, a firm that performs forensic loan audits on mortgages for borrowers' lawyers. "Some mortgage servicers require a borrower to be 30 days late or more," Bedard says. "Some will work with you before you are late (that is rare). This is really a luck of the draw on who your mortgage servicer is and sometimes the negotiator you are assigned." But the new federal assistance does not require that homeowners be in default before they seek help.

If you have questions on whether you're eligible for a modification, you can complete a quick quiz on the Making Home Affordable site. You won't get a definitive answer, however, so Roberts suggests reaching out as soon as you think that you could be getting into trouble.

2. You need professional help (or do you?): One of the first questions you need to answer is whether you want to tackle pursuing a loan modification yourself. Should you hire an attorney or a loan-modification firm? Seek help from a nonprofit housing group? The advice varies.

"Are you savvy enough, and do you have the time, to battle these lenders on your own?" Bedard asks. "It's always wise to have someone help you." However, he adds, "if you do have some type of track record, and you have some time and you are savvy about these things, then you could tackle it yourself … because no one is going to fight like you."

Alexa Milton, homeowner advocacy and partnership director for the nonprofit Acorn, recommends seeking out an agency like hers – a HUD-approved counseling agency (find one here) that doesn't charge for its services and that has extensive experience dealing with loan modifications, even complex or tricky ones. "You shouldn't have to pay for these services," Milton says.

Depending on state laws, it can even be illegal to charge upfront for these services – a definite warning sign if you're vetting loan-modification companies.

Roberts says spending perhaps $2,500 on an attorney who's well-versed in these issues can be money well-spent. There are a number of loan-modification scams out there, so be careful not to pay any fees upfront or disclose bank-account information to parties other than your loan servicer or bank.

3. Uncover your lender: Knowing who your lender is may help you get a better modification. These days, your loan is either owned by a single bank or it’s been sliced up into tiny pieces and turned into a mortgage-backed security and is owned by many people.

“If the bank owns the loan, you for sure have the possibility of getting more flexible terms, because they don't have to go anywhere else to get pre-approval,” Roberts says. "You really don't know what you qualify for unless you know who owns your loan."

How to find out? Go directly to your mortgage servicer and ask who owns your loan, Roberts says. You can find servicers' phone numbers on your mortgage statement or book of payment coupons or at Hope Now. You also can try the Web sites of Fannie Mae and Freddie Mac, where you can input your address to find out if it is a Fannie or Freddie loan, respectively.

In addition, the new Making Home Affordable program hopes to help about 9 million American households. Participation by servicers is voluntary, but the government is offering incentives for them to participate. Most major servicers are expected to participate, and an updated list can be found on the Web site.

4. Be honest: As part of an application, you'll have to gather a bunch of your financial information and present it to the lender. Give the lender exactly what it needs, so the process goes swiftly. And make sure it's accurate. "It can be tempting to bend the truth when you are trying to convince a lender to approve a loan modification," Roberts writes on his blog. "Some homeowners are embarrassed by something they did to place their finances in jeopardy – possibly a gambling addiction or substance abuse. Others try to fudge the numbers to make themselves eligible for a loan modification they cannot otherwise qualify for." But now isn't the time for deception or anything less than full disclosure, Roberts says. It will only come back to bite you.

According to the Making Home Affordable site, you'll want to gather the following paperwork before reaching out to your servicer:

  • Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources.
  • Your most recent income-tax return.
  • Information about your savings and other assets.
  • Information about your first mortgage, such as your monthly mortgage statement.
  • Information about any second mortgage or home-equity line of credit on the house.
  • Account balances and minimum monthly payments due on all of your credit cards.
  • Account balances and monthly payments on all your other debts such as student loans and car loans.
  • A letter describing any circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, illness, etc.) if applicable. (See next tip on how to craft the perfect letter.)

5. Write the ideal hardship letter: As part of your paperwork, you'll have to write a so-called hardship letter that explains how you got into this mess. This letter is very important and needs to be written well. "You want to be to the point but also specific," says Acorn's Milton. "If the servicer can't understand why you originally fell behind from reading your hardship letter, they may wonder whether there's other things going on that you're not telling them.

"One common mistake would be (for example) if someone had a heart attack in August, and they spent most of the letter talking about how that put them behind, when their finances actually show that they started to fall behind in June."

That letter writer should have been precise in explaining the exact train of events: His hours at work were cut back in the spring, which led to trouble with the mortgage, which led to more stress, which led to the heart attack in August, for example. That makes more sense, Milton points out.

And keep it concise, she says. "It's easier to read a two-paragraph or three-paragraph letter than a five-page letter."