Create a plan. Assess your position.

Realistically assess your bargaining position before beginning negotiations with your lender; this requires taking a hard look at your finances and presenting a credible plan to the lender. Do not make the lender come up with the plan. You are in a stronger position if you present your best scenario and let them adjust it.

Your workout plan may include asking the lender to:

• Reduce or defer principal payments and just pay interest.
• Refinance.
• Use any reserve or escrow account to catch up on payments.
• Establish a moratorium period (deferral) for loan payments.
• Delay filing the Notice of Default. This keeps it off the public record and preserve your credit. You should examine your credit report at this point. (You can obtain a free report here).

If the moratorium period is lengthy (over six-months), ask the lender to add the entire amount in amount overdue to the end of the loan as a "balloon." This large lump-sum payment is not due until the very end of the mortgage.

Propose a Solution

Prepare an income and expenses statement and offer to give the lender 100% of your excess income until a certain date. The lender won't do better than that!

A repayment plan is easiest for the lender to accept. Every month, in addition to your regular mortgage payment, you pay a portion of the money in arrearage. A typical plan looks like this: your monthly payment is $1,000 and you are three months behind. Three thousand dollars in arrearages is spread over six months. Your monthly payment for the next six months is $1,500 (plus interest).

Show Good Faith

Show good faith by getting a second job, selling assets such as a car, or renting a room to a boarder. Tell the lender you will apply this additional income to paying off your plan.

Communicate with your lender. Making a phone call to talk about what is essentially a problem for both you and the lender is preferable to waiting until the lender sends you a past due notice.

As uncomfortable as is it may feel, you should go to the lender as soon as possible and put all the facts on the table.

Don't Procrastinate!

You should not go to the lender when you are already six months in arrears; it is much better to go before the first month is past due.

Obviously, you know when you are having trouble sooner than the lender does.

For more information about negotiating, I recommend reading Negotiating for Dummies by Michael C. Donaldson.