Qualification

• The federal government only offers loan modification to homeowners with qualifying loans. To qualify the homeowner must live in the house as their primary resident. They must have closed on the current mortgage before Jan. 1, 2009, and owe $729,750 or less. The homeowner must be having a financial hardship and either currently be late on a mortgage or at risk of missing a payment. The current loan payment cannot exceed more than 31 percent of the borrower's pretax income. The borrower must also be able to document her current income. She also cannot have a convicted for felony theft, fraud, forgery, tax evasion, money laundering or larceny in the past 10 years.
  
  

Application

• Servicers are encouraged to modified loans for homeowners, but they are not required to. To find out if a homeowner qualifies for a modification, the federal government requires the servicer go through an approval process. To begin this approval process, the homeowner must complete an application and foreclosure prevention counseling from a Housing and Urban Development (HUD)-approved housing counseling agency. This beginning application process will help the homeowner understand how a modification may help her and if the modification is right for her.
  
  

Approval

• If the homeowner decides he wants to go through with the modification, he must provide the servicer with proof of his current income and proof of the financial hardship. This could be as simple as providing proof of unemployment or proof of underemployment through pay stubs. It could also require providing retirement benefit documents, tax returns or bank statements. The servicer reviews all of these documents and tries to find a way to change the payment on the mortgage so it does not exceed 31 percent of the homeowner's current pretax income.
  
  

Test Period

• Loan modifications eventually become permanent. They are not the same as forbearance, where the borrower is temporarily given a lower payment and then goes back to the initially agreed amount after a certain amount of time. When a loan is modified to a new lower payment, the payment is permanent for the life of the mortgage. To ensure the homeowner can continue to make the payments at the new modified rate, the servicer requires the homeowner complete the trial period before permanently modifying the loan. Often servicers look for the homeowner to make three payments in a row without being late. If the homeowner is late on one of those three payments, the servicer can cancel the modification.