Sometimes unforeseen events in life occur, making it difficult or impossible to make your mortgage payments. In that case, a lender has the right to foreclose on your home.
Foreclosures are typically expensive and inconvenient for everyone concerned; they are rarely the preferred outcome for borrowers or lenders. Loss mitigation was created for precisely that reason.
Loss mitigation is the process of giving alternate loan repayment options to homeowners and lenders in an effort to prevent foreclosure.
Not only may foreclosures be bad for borrowers, but they can also be bad for the housing market and the overall economy. The United States government learnt that lesson during the housing and financial crisis of 2008, and in response, it established the Federal Housing Finance Agency (FHFA) and put loss mitigation measures in place to help fight rising foreclosure rates.
Today, in addition to ensuring the stability of the American housing finance system, the FHFA is in charge of observing and regulating the secondary housing market (where lenders and investors buy and sell mortgages).
Loss mitigation may be able to assist you in regaining financial stability and getting back on track with your mortgage payments if you are having financial difficulties and are concerned about the potential of going through with a foreclosure.
Read on to find out what loss mitigation is, how it operates, and what choices lenders provide if you’re facing foreclosure.
Definition of Loss Mitigation
Loss mitigation assists borrowers, lenders, and investors in avoiding the unwelcome foreclosure process. Loss mitigation occurs when the borrower and the lender collaborate to identify a workable substitute that benefits both parties and averts a foreclosure.
Consider the scenario if you stopped paying your mortgage because you lost your job. Although your lender has the legal right to foreclose, doing so is definitely not the best course of action for you both because you’ll lose your house and the money you invested in it, and the lender will probably also lose money.
Your lender agrees to allow you stop making mortgage payments for three months while you look for work after reviewing your choices with them. Your lender will let you keep your home as long as you agree to start making payments again in three months.
This scenario’s mortgage forbearance program from the lender is simply one method of loss mitigation. We’ll go into more detail about this and other examples later.
Loss Mitigation: How Does It Operate?
Offering debtors alternatives to their regular payments, such as repayment plans, loan modifications, and mortgage forbearance, is how loss mitigation works. Loss mitigation can involve both short-term and long-term measures to deal with both continuous and enduring financial challenges. Loss reduction is not a precise science. So a lender might provide any one of a number of loan payment options depending on your circumstances.
Changes to the loan terms are disclosed to the credit bureaus when you accept a lender’s loss mitigation offer. Your credit score might suffer in some circumstances, while it might not be impacted in others.
Let’s examine various loss mitigation options that a lender may offer if you’re having trouble making your regular monthly mortgage payments.
Mortgage forbearance refers to the temporary suspension of your monthly mortgage payment by your lender to allow you to accumulate savings and regain financial stability. Forbearance usually lasts between three and six months, although you are permitted to ask for an additional extension.  Remember that forbearance on your mortgage does not permit you to miss payments. The whole loan balance, including the months where payments were suspended, is still your responsibility.
Delay or a portion of a claim
At the end of your loan, a deferral or partial claim enables you to make up missed payments (without accruing interest) (i.e., when you sell or refinance). These loss mitigation options, sometimes referred to as junior liens, typically take the form of a second mortgage.
Repayment plans are a popular form of loss mitigation that let you pay back late fees by spreading them out over time. For instance, if you are late on $2,000, your lender may spread the $2,000 charge over 10 months, increasing your normal payment by an additional $200 each month. If you continue making these payments for ten months, your mortgage will be current.
By paying a one-time lump sum to cover your loan’s outstanding balance as well as any missed payments, you can stop the foreclosure process and restore your mortgage. Your lender may send you a mortgage reinstatement letter if you are in default, outlining the amount you must pay to catch up on your payments. After you make that payment, your mortgage will be reactivated, and you can resume paying your loan servicer on a regular monthly basis.
Modifying a loan
A loan modification modifies the terms of your mortgage as a loss reduction strategy. To assist make monthly payments more manageable, several loan modifications include extending the loan’s term or lowering the interest rate.
In a short sale, the lender agrees to the sale of your home for less than the amount of the mortgage that is still owed. The lender either forgives any more debt you owe once the house sells or seeks a deficiency judgment to recover the remaining loan total after the house sells.
In lieu of foreclosure, a deed
An arrangement to voluntarily transfer ownership of your home to the lender when you are unable to make payments is known as a deed in lieu of foreclosure. In exchange, the lender releases you from debt and pays off the mortgage loan.