Saturday, July 18, 2009 - Page updated at 12:00 AM

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Loan modification: What borrowers need to do before getting started By ADRIAN SAINZ The Associated Press

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 eligibility for a loan modification.

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.