How to negotiate with your mortgage lender

Dollar sign on house

If you've lost your job and fallen behind on your mortgage, you need to ask your lender for help before you're foreclosed upon and evicted.

At the very least, you need what's called forbearance, which will allow you to make reduced payments for up to six months, giving you time to look for work.

But with so many workers taking new jobs that pay less than their old ones, you'll probably need to seek a more serious modification that permanently lowers your monthly payments.

That's a tough sell because it requires the bank or mortgage servicing company to reduce the interest rate, extend the length of the loan or even forgive some of the debt.

We can tell you what to do, what to ask for and what to expect.

Just be ready for long, frustrating negotiations that may, or may not, succeed.

Start by calling your lender's customer service number and explain that you need to talk to someone about restructuring your loan because you've fallen behind on your payments.

The bank or mortgage servicing company that collects your payments for the investors who own your loan will have a loss mitigation department that works with borrowers with troubled loans.

However, that department isn't always easy to reach.

Customer service reps may tell you it doesn't exist because the lender calls it something else. If that happens, ask if they have a workout department, loan modification department or reinstatement department.

When you reach the correct department, tell the service rep what's happened and that you want a mortgage modification.

You'll be asked to fill out forms about your finances, including how much you owe to other creditors.

Include a letter that describes how you lost your job and what you're doing to find a new one. Lenders are most likely to help borrowers who are working through a short-term hardship and have the ability to resume regular payments.

Don't be surprised if it takes two or three months to get an answer.

During that time, keep in frequent contact with your lender and remain in your home even if the foreclosure process is under way. You may not be eligible for assistance if you move out.

The lender will use the information you provide to determine if you can weather your financial crisis and resume making your mortgage payments.

If it believes you can, your mortgage may be modified in a meaningful way.

About the best you can hope for is having your current payment temporarily reduced through forbearance, having future payments reduced through a lower interest rate, extending the term of the loan by five or 10 years, or both.

Lenders can forgive part of your debt, but they only do so in a few, extreme circumstances.

If your lender thinks there's little or no chance that you'll be able to resume making your payments -- even if it reduced the interest rate or extended the loan -- it will only offer you a way to catch up on your existing loan.

Reinstatement, for example, allows you to catch up on any missed payments and pick up paying your monthly obligation as before.

Revised repayment plans add missing payments to future payments on a prorated basis, plus interest.

Both will increase the amount of your monthly payments and are a clear signal your lender sees no point in modifying your loan.

Unfortunately, banks and mortgage servicing companies are more likely to offer catch-up plans than modified mortgages.

What should you do if you can't get your loan modified?

Ask for a short sale. That will let you sell the house for less than you owe on the mortgage.

The lender agrees to write off the difference, which they're often willing to do if they'll lose less money than following through with a foreclosure.

(You also can offer to give up the deed in lieu of payment, and the lender may agree to write off your debt in exchange for the title to the home -- another, less widely used option.)

If you do get approval, make sure the agreement clearly states the proceeds of the sale will be payment in full "without pursuit of any deficiency judgment."

You'll lose your home in a short sale. But it's better than going through a foreclosure, which drops your credit score 250 to 280 points and requires you to wait 36 to 60 months to get a reasonable interest rate for another home purchase.

A short sale only drops your credit score 80 to 100 points, and you can usually land a decent interest rate after 18 months to buy a new home.