How do I know which Loan Modification companies are a scam? I have been asked this question numerous times.
Unfortunately, there ARE a lot of companies who are in this new industry to scam people (approximately 75%), and some aren't educated enough to know that they are hurting people instead of helping.
This is what I found during my research: Tell tale signs of a Loss Mitigation Scam:

• Charges a huge upfront fee : There are some Loan Modification companies who will charge sometimes up to $7500 to contact your lender and ask for a loan mod, and in some cases, when turned down, they will keep 1/2 your money and return the rest, or may return nothing to you by claiming they did their job and are entitled to that fee.
  There should be a money back guarantee and have other alternatives for you.
  
• Collects upfront fee with out explaining the process, or does not seem interested in your circumstances.
  Anyone legit will listen and care about what your going through, and will explain exactly what you are paying for and what to look forward to while on the program.
  There should be no unanswered questions.
  
• Does not stop the foreclosure legally If your home is in foreclosure and a company negotiates on your behalf, what if the lender takes a long time to respond? Your may lose your home).
  
• Will accept the first proposal from the lender - You pay an upfront fee for a Loan Mod, and with in 90 days your bank comes back with a modification that does not suit you or your budget.
  or worse had not even been contacted.
  Basically what you did is buy yourself 3 months and most likely will find yourself in the same situation.
  Problem is, you may only utilize a 3rd party negotiator once, and you could have negotiated with your bank on your own with out the fee and ended up with the same terms.
  If you are working with an attorney based legit company your loan mod should turn out significantly better.
  
• Virtual Company: How would you feel if you went with a company that had no real office to visit and may be working out of their basement.
  This is a question that needs to be asked and verified.
  
• Seem to good to be true? If you are being promised an interest rate, or and exact principle reduction amount, most likely you are just being told what you want to hear.
  Please note that no one can promise you anything without negotiating with your lender.
  
• Is there an approval process? Before you agree to paying any fee at all, there should be an application process which would determine if you qualify for this assistance.
  This should not include credit qualifying.
  Credit is not a determining factor.
  The application should include, your budget, income, property info, and hardship, basically an entire package should be submitted and reviewed before the loan mod company decides to take on your case.
  Your approval should not be determined on the first phone call.
  
• Can not find them on the BBB, or anywhere else for that matter? Most companies who have been in business for at least a year will have a rating with the better business bureau whether they are a member or not.
  There are companies popping up left and right.
  You want to make sure you are working with a leader in the industry.
  Simple research can help you determine this.