How “Loss Mitigation” Can Help You Avoid Foreclosure
Falling behind on your mortgage payments is an incredibly stressful situation. If you miss several payments, the lender may begin the foreclosure process to take possession of your home. However, foreclosure is typically a last resort for lenders because it is a costly and time-consuming process. That’s why mortgage servicers have “loss mitigation” options to help homeowners avoid foreclosure when possible.
What is loss minimization?
Loss mitigation refers to various solutions and processes that mortgage companies use to work with homeowners and try to avoid foreclosure. The goal is to find an alternative that is acceptable to both the borrower and the lender. Some common loss mitigation options include:
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Loan Modification: Permanently changing the terms of a loan, such as extending the repayment term or lowering the interest rate, to make payments more affordable.
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Forbearance: Allows you to temporarily pay a smaller payment or no payment at all for a set period of time, with missed payments being repaid later or added to the loan balance.
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Repayment Plan: The lender allows you to repay the missed payments along with an available portion of the past due amounts as an addition to your regular monthly payments.
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Short Sale: Permission to sell a home for less than the amount owed on the mortgage if the lender agrees to the terms.
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Deed in Lieu of Foreclosure: Transferring the deed to the house back to the lender if he agrees to accept it as payment and release you from your mortgage.
How to Use Loss Mitigation Options
The key is to be proactive and contact your mortgage service provider as soon as you realize you’re having trouble making payments. Most have loss reduction departments that can explore options tailored to your situation. Be prepared to explain why you are behind and provide documentation such as pay stubs, bank statements, tax returns, etc.
You may have to go through the Loan Modification Application process , in which you provide information that allows the lender to determine whether you qualify for a loan modification option. Be responsive to all requests for documents and persistent in communication.
Foreclosure is a lengthy process, so there is usually time to work with the lender on a loss mitigation solution. However, don’t wait until you’ve missed a few payments to seek help. Lenders are much more willing to work with homeowners before foreclosure has begun.
By taking advantage of loss mitigation programs, many homeowners can receive financial relief and avoid the significant impact of foreclosure on their credit and finances. With open dialogue and a willingness to provide requested information, it may be possible to find an alternative path forward. Moreover, here are the first steps you should take if you are facing foreclosure.