Whether or not one qualifies for a loan modification depends on a few factors, which we will describe below. But, just like qualifying for an Offer and Compromise on your back taxes, you need to be experiencing some sort of hardship. Essentially: if you ain't hurtin', the bank ain't helpin'. 

Do You Need to be Late on Your Mortgage to Qualify for a Loan Modification?

The short answer is yes. “How much” really depends on how many other people your bank has that are worse off than you are. If you are 2 months behind on your mortgage and your bank has an enormous queue of people that are 6 months behind, then your case will not be considered a priority and will take months to get modified. Given the current mess of the mortgage market, most banks won’t even look at your file until you are 90 days behind.

If you are not yet late on your mortgage but are experiencing a decrease in income or some other hardship you can contact your bank and see what they will work out, but 99% of the time they will tell you to call back once you are actually late. The assurance the bank has by modifying only those late on their mortgages is that those borrowers have destroyed their credit. Ruining credit essentially punches your ticket. 

What if My Financial Situation is Unchanged from When I Qualified for the Loan?

All modifications require you to be experiencing some sort of hardship and not just electing to not pay your mortgage. Here are what banks will consider hardships:

• Decrease in income
• Loss of a job by one, of if not both, of the borrowers
• Unexpected Medical Payments
• Increase in Mortgage Payment (see below for description)
• Loss of tenant                                                                                                                                                  

Again, the bank wants your credit to be destroyed before allowing a loan modification. Most people that simply wanted to have a lower mortgage payment would try a few other avenues before going 90 days late and ruining their credit. A Loan Modification requires as much verification, if not more, of your financial situation as your original mortgage did, and if you are putting money into your savings account or spending a lot of money on non-essentials, the bank won't modify your mortgage.

If My Mortgage Payment Increases but My Income is Unchanged, Will I Qualify for a Loan Mod?

The situation of having your ARM adjust upwards but your income remaining flat produces the same predicament as having a flat payment and decreased income. So yes, this will allow you to qualify you for a loan modification. When you initially qualified for your ARM loan, if the bank was smart, they would not have used your stat rate when calculating your debt to income ratio (DTI). Ideally, they should have used a heavily adjusted payment to qualify you, ensuring that you would be able to pay your mortgage once your payment went up. 

Bankapedia's Take

Just like those that were short-sighted when they put themselves in a loan they couldn't afford, many of those getting loan modifications can probably afford to make their current monthly payment but just see an opportunity not to. While the idea of destroying your credit to save some money seems odd to most, there are plenty of people that would rather try and get their loan modified than make their monthly payment. The biggest reason is that these people once regarded their house as a great investment, and now it has just become a giant albatross. In short, their paycheck is being eaten up by big fat monthly payments on a house they see as never being worth more than they will owe. Many people take it one step further and simply walk away from their house and mortgage and just decide to rent, as they foresee being underwater for the next decade and beyond.