How to Renegotiate a Mortgage

If you're struggling to stay current on your mortgage payments, you may be able to renegotiate the terms of your loan.

Default and delinquency rates are rising nationwide as the economy continues to decline. Foreclosure proceedings are expensive, however, so banks are trying to avoid them by offering to modify delinquent loans, according to the most recent Mortgage Metrics report from the federal Office of Thrift Supervision.

Mortgage modifications formerly were reserved for homeowners who were already behind on their payments. Now, however, lenders are willing to offer them to homeowners who are still current and who meet certain conditions. In particular, Citigroup (C), JPMorgan Chase (JPM), HSBC (HBC) and Bank of America (BAC) have been willing to undertake preemptive modifications.

Here's what you need to know to talk to your lender about renegotiating your mortgage.

Debt-to-income ratio: Your lender will base its decision on your request for a loan modification based largely on your debt-to-income ratio, or DTI. Your DTI is a measure of how much of your pretax income is taken up by your housing costs. Typically, the industry uses a DTI of 33% to qualify homeowners for a mortgage. If your DTI is significantly above that figure, your lender may be willing to make some changes on your loan. Ultimately, loan modifications are aimed at getting the DTI to roughly 38%.

Loss mitigation: If you think your DTI qualifies you for a loan modification, call your lender and ask for the loss-mitigation department. Explain why you are struggling to stay current -- there's no sense in understating or overstating your situation. Typically, the loss-mitigation department will ask you to reiterate this information in a letter of hardship, and they'll ask you to send the necessary financial documents to corroborate your story.