Q: I heard you mention something about a loan modification and wanted to find out more.

We’re not behind in our mortgage payments yet, but my husband’s company suspended all overtime and we’re now struggling to make the payments.

I was wondering if a loan modification would allow us to lower our interest rate (we are currently at 6.625 percent on a 30-year fixed). We would be open to increasing the term of the loan to 40 years to get a lower monthly payment until the economy picks up. I would appreciate any advice you can give.

A: Since January, new government policies on loan modifications and loan refinances have gone into place.

There is a significant difference between a loan modification and a loan refinance on the government. A loan modification is now for those who are severely delinquent on their mortgage payments. If you’re more than 60 or 90 days late on your mortgage, you’re considered to be severely delinquent. (According to the housing industry, most homeowners who are only 30 days late on their mortgage “self-correct,” meaning they find a way to make up the missing payments and get back on track.)

If you’re delinquent, you’ll want to contact your lender immediately and ask for the loan mitigation department. Or, call the federally-sponsored Hope Now hotline: 888-995-HOPE. A housing counselor will talk to you about your options and schedule a three-way call with your lender.

The goal of a loan modification is to get your payments more in line with your actual income. So if your income has dropped, a loan modification may be able to lower your interest rate for a few years or extend the term of your loan in order to get your debt-to-income ratio to 31 percent (of your gross income).

Since you haven’t been paying late, refinancing your home might be an option. If your mortgage is no more than 105 percent of your home’s current value and your loan is held by or serviced by Fannie Mae or Freddie Mac, you may qualify for a refinance at today’s low interest rates. Contact your lender to see if you qualify.

You can also check out MakingHomeAffordable.gov, which explains the difference between the government’s refinance and modification programs, and allows you to look up your loan to see if it qualifies.

If you have an FHA loan, you may be able to do a Streamline FHA refinance, in which your lender may simply adjust the interest rate of the loan down to something lower than where it is currently. What’s nice about an FHA loan modification is that it likely won’t require another appraisal of the property.

April 9, 2009