What Is Loss Mitigation in Mortgage?

Loss mitigation in mortgage is a process that lenders use to help borrowers avoid foreclosure and perhaps even stay in their homes. More commonly, lenders help you transition out of your home without the financial hit of foreclosure. Benzinga helps consumers understand various loss mitigation tactics so they know their options and what their lender offers them. Read on to find out more.

What Is Loss Mitigation in Mortgage?

Loss mitigation is a tactic lenders use to help those struggling to make their mortgage payments or those who miss a mortgage payment. The goal is to help the borrower repay on time while living in their home. However, some borrowers eventually find that their mortgage is not affordable. If that happens, loss mitigation can aid the homeowner in leaving their home without foreclosure on their financial record.

Borrowers struggling to meet their mortgage obligations should contact their loan servicer. This is the company to which you make your payments. Your loan servicer does more than collect payments and aid in escrow; they also help you understand your options when faced with payment struggles. Review where your mortgage payments are to see who you should call if you have questions. It might not be the company you originally took your mortgage out with.

What Happens in Loss Mitigation?

The details of what happens during loss mitigation will vary based on what you and your lender decide is the best path forward. Sometimes, it means pausing payments until you find your financial footing again. In other circumstances, it involves the challenging decision that the best move for you financially is to sell your home. Ideally, whatever you end up with prevents a foreclosure, which has the greatest impact on your finances and your ability to qualify for a loan in the future.

Options for Loss Mitigation

When you realize you won’t be able to make a mortgage payment, you should reach out to your loan servicer. The sooner, the better, to protect your ability to stay in your home, if that’s your preference. Your loan servicer might be able to provide you with some relief. Some tactics do impact your credit score, which you should weigh the pros and cons of before accepting the relief. The alternative, in most cases, is moving out of your home.

Here’s a look at your loss mitigation options when you struggle to make your mortgage payments.

Forbearance

Most lenders will start with forbearance when customers struggle to make their loan payments. This offers a pause to your mortgage payments as a chance to regain financial health. Your payments will resume and you’ll still owe the paused payments. How those payments get distributed and repaid will depend on your mortgage investor.

Repayment Plan

Another loss mitigation tactic is to put you on a repayment plan. In this case, the payments that you missed get spread out over a set number of months and added to your normal mortgage payment until you catch up on your mortgage. The setback to this tactic is that it increases your monthly payments significantly, which can be a hardship until you’ve paid back the missed payments.

Loan Modification

A loan modification allows you to change your mortgage terms to include your missed payments as part of your loan. That way, your mortgage is current. However, when you make the modification, your interest rate or the loan term can change. The rates for a loan modification can fluctuate, so try to change during hospitable rates.

This tactic could increase your monthly payment due to the chance of increased rates. Evaluate other options for paying missed payments first before resorting to this option when you can.

Deferral or Partial Claim

Some circumstances that borrowers experience qualify them to add missed or deferred payments to the end of their mortgage. That means if you pay off the mortgage, sell the home or refinance the loan, those missed payments will come due.

Reinstatement

The easiest way to get your loan current and move forward with your existing loan terms is to use reinstatement. This involves paying all past-due payments once your forbearance period is completed. While that can mean a large sum of money all at once after you’ve suffered financial hardship, it aids in ensuring you don’t have larger payments moving forward and gives you a restart. 

Sell Your Home

When you can’t realistically make your payments or keep up with your mortgage, selling your home might be the best option. This helps mitigate credit impacts and can help you recoup the equity you have in your home before the bank seizes it to pay off your debt. 

While selling your home can be challenging, it’s far better to sell early than to wait and go into foreclosure. This will protect your home’s equity and your credit because foreclosure is hard to reverse. 

Deed-in-Lieu of Foreclosure

While the deed-in-lieu of foreclosure still involves you moving out of your home, you might have more time to do so and less impact from a full foreclosure. Your lender can decide whether you qualify for this option, which often comes down to whether your home is worth the amount you owe on the loan. 

You’ll still experience negative credit impacts. Much like a short sale, the lender might be able to require that you pay the difference between the home’s sale price and what you owe on the loan. This can be quite costly and make it challenging for you to find a reasonable place to live. 

The largest benefit to this loss mitigation tactic is that you might qualify for a conventional home loan within four years of the deed-in-lieu of foreclosure. In comparison, a foreclosure often requires a seven-year waiting period before you qualify for a conventional home loan again. 

Short Sale

When the value of your home isn’t enough to cover your outstanding loan and missed payments, a short sale can be a good option. This gives your lender the chance to sell your home for less than your loan’s value. That way, the lender recoups some expenses and doesn’t have to go through the complex foreclosure process, which often involves waiting for the money from the home for many months. 

The lender is in full control of whether to offer this option. If they do accept it, they also have full control over accepting or declining offers on your home.

Using this method does involve credit impacts. However, the credit impacts are less than those of a foreclosure. Additionally, your lender might be able to make you continue payments on the principal and interest for the home’s value that it did not get from the short sale. That means if you had a $300,000 home loan and your lender could only recoup $270,000, you might still be liable to pay $30,000 to the lender. State laws vary on how short sales work.

How to Apply for Loss Mitigation

Once you know that you won’t be able to meet your mortgage obligation, you should contact your servicer. Don’t wait around to see what happens after you miss a payment or several payments. The sooner you reach out, the more options you will likely have.

Loan servicers all have slightly different ways of handling the loss mitigation process. Roughly, you will see a process that looks something like this:

1. Contact the loan servicer: Outline the struggles you’re facing and why. The loan servicer will use that information to help find an option that is a good fit based on your circumstances.
2. Complete a loss mitigation application: You’ll answer questions about your financial situation, budget, employment, etc. Your loan servicer will require a specific set of information.
3. Await a decision: While it can feel grueling to wait and hear from your loan servicer, they need time to review the information you provide them. It should take no more than 30 days for your lender to provide an acceptance or denial of your application.

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Preventing Foreclosure and Protecting Your Long-term Financial Health

The two greatest benefits to loss mitigation are that it prevents foreclosure and can improve your long-term financial health. For the greatest benefits from loss mitigation, contact your loan servicer immediately once you know you can’t make a payment. Ask about your options and work toward a resolution that matches your financial situation.

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