If you’re underwater on your property and having trouble making payments, getting a loan modification could be a much more reasonable approach than a straight out default or foreclosure.

A loan modification involves restructuring your existing loan so that your payments drop below 31% of your gross monthly income. In other words, your bank will work with you to make sure you can afford your monthly payments.

How do you get a loan modification?

==> Save Up Your Late Payments

Many homeowners who’ve missed a payment or two decide to stop entirely – then spend the extra money. They use it to pay off other debts or just put it towards expenses.

This is a mistake. Instead of spending this money, put it away in savings. When you negotiate for a loan modification, you’ll usually be required to put up some “good faith” money.

Saving up your late payments will help you afford this when the time comes.

==> Gather Your Documents

The most important documents for you to gather are your expenses and income documents. You should have all your pay stubs, as well as proof of expenses.

That means things like your lease document, your phone bill, your utility bills, grocery bills and the like.

In order to make a case that you can’t afford your loan right now, you need to be able to prove each and every dime of your expenses.

==> Beginning the Talks

Call up your lender and ask for the loss mitigation department.

Keep in mind that there’s a good chance you won’t actually get directed to the loss mitigation department. Instead, often you’ll be forwarded to a collector instead.

A collector’s job is to try and get you to pay back the money through pressure tactics. On the other hand, a loss mitigation rep actually has the authority and means to work with you to restructure your loan.

If you get the sense that you’re dealing with collections instead of loss mitigation, ask to speak with a manager or hang up and dial again until you reach the right person.

Once you’ve begun the talks, be completely honest. Lay out your financial picture and let them know that there’s just no way you can afford the payments as it is.

Banks can be understanding. It’s often in their best interest to work with you rather than go in for a foreclosure. A foreclosure costs the bank a lot in legal fees and could result in a house sitting on the market for months. Also, they lose the difference between the loan amount and the market value.

So, banks will be willing to work with you. Just make sure you’re talking to the right person when you call – the loss mitigation department – and have all your proof of expenses and income in order.