Sometimes, life brings unexpected surprises that make it difficult or impossible to keep up with your mortgage payments. If that happens, a lender can foreclose on your property.
Foreclosures are rarely the desired outcome for borrowers or lenders; they usually end up being costly and inconvenient for everyone involved. That’s exactly why loss mitigation exists.
Loss mitigation refers to the process of trying to help homeowners and lenders avoid foreclosure by providing alternative loan repayment options.
Foreclosures can negatively impact not only borrowers but also the housing market and broader economy. During the 2008 housing and financial crisis, the U.S. government learned that lesson and responded by creating the Federal Housing Finance Agency (FHFA) and implementing loss mitigation programs to help combat rising foreclosure rates.
Today, the FHFA is responsible for overseeing and regulating the secondary housing market (where lenders and investors buy and sell mortgages), in addition to maintaining the health of the U.S. housing finance system.
If you’re struggling to make your mortgage payments and are concerned about the possibility of foreclosure, loss mitigation may be able to help you recover financially and get back on track with your housing payments.
Keep reading to learn what loss mitigation means, how the loss mitigation process works and what options lenders offer if you’re facing foreclosure.
What Loss Mitigation Means
Loss mitigation helps investors, lenders and borrowers avoid the unwanted process of foreclosure. Loss mitigation is when the lender and borrower work together to find an agreeable alternative for both parties to avoid a foreclosure.
Let’s say you stopped making payments on your mortgage because you lost your job. Your lender has the right to foreclose, but that likely isn’t the best solution for either of you, since you’ll lose your home and the money you put into it, and the lender will probably lose money, too.
After discussing your options, your lender agrees to let you pause your mortgage payments for three months while you search for a job. As long as you promise to resume making payments within three months, your lender will allow you to keep your house.
In this scenario, the lender is offering mortgage forbearance, which is just one example of loss mitigation. We’ll discuss this and other examples in more detail later.
How Does Loss Mitigation Work?
Loss mitigation works by offering borrowers alternatives to their regular payments, such as repayment plans, loan modification and mortgage forbearance. Loss mitigation can include both temporary solutions or ongoing solutions to address short-term and permanent financial hardships. Loss mitigation isn’t an exact science. So depending on your situation, a lender may offer any one of several loan payment alternatives.
When you accept a loss mitigation offer from a lender, changes in the loan terms are reported to the credit bureaus. In some cases, that might mean your credit score will take a hit, while in others, your score may be unaffected.
Let’s look at some loss mitigation options a lender might provide if you’re having a tough time making your normal monthly mortgage payments.
Mortgage forbearance is when a lender temporarily pauses your monthly mortgage payment so you can build up your savings and get back on your feet. Forbearance typically lasts for 3 – 6 months, but you may be able to request an additional extension. Keep in mind that mortgage forbearance doesn’t mean you can skip payments. You’ll still be responsible for paying back the entire loan, including the months where payments were paused.
Deferral or partial claim
A deferral or partial claim allows you to repay missed payments (without having to pay additional interest) at the conclusion of your loan (i.e., when you sell or refinance). These loss mitigation options usually appear as a second mortgage and are also known as junior liens.
A repayment plan is a common loss mitigation solution that allows you to pay back missed payments by splitting up the charges over time. For example, if you’re past due on $2,000, your lender might split the $2,000 charge over 10 months, adding an additional $200 per month to your regular payment. After 10 months of making these payments, you’ll be current on your mortgage.
Mortgage reinstatement is when you stop the foreclosure process by making a lump-sum payment to catch up on your loan and any defaulted payments. If you’re in default, your lender may send you a mortgage reinstatement letter detailing how much money you need to pay to become current on your payments. Once you make that payment, your mortgage will be reinstated, and you can continue with your regular monthly payments to your loan servicer.
A loan modification is a loss mitigation option that changes the terms of your mortgage. Some examples of loan modification include extending the length of the loan or reducing the interest rate to help make monthly payments more affordable.
With a short sale, the lender approves the sale of your house for less than what you owe on your mortgage. Once the house sells, the lender keeps the money from the sale and either forgives any additional debt you owe or pursues a deficiency judgment to collect the amount remaining on the loan balance.
Deed in lieu of foreclosure
A deed in lieu of foreclosure is an agreement to voluntarily turn your house over to the lender when you can’t make payments. In return, the lender relieves your debt obligation, satisfying the mortgage loan.
The Loss Mitigation Application Explained
A loss mitigation application should be submitted as soon as you think you’re going to have trouble making mortgage payments. Loss mitigation applications are how you tell your lender about your financial hardship and share the information they need to provide loss mitigation options.
Loss mitigation applications include your personal information, details of your finances, the number of household members and ongoing housing expenses. Another key component of loss mitigation applications is whether you want to keep or sell the property. This is a crucial question because certain loss mitigation options work to help you stay in the home, while others are designed to satisfy the mortgage by selling or relinquishing the property.
FAQs for Loss Mitigation
When exploring your loss mitigation options, you might have questions. Common FAQs about loss mitigation include:
Will loss mitigation hurt your credit?
Depending on the loss mitigation option you and your lender agree upon, loss mitigation can hurt your credit. When you default on your loan payments or make changes to your mortgage, lenders are required to report these events to credit agencies.
However, there may be some credit protections available to you through the CARES Act or state laws, and lenders must provide an updated report to the credit bureaus as soon as you get current on your mortgage payment.
What happens after a loss mitigation?
Loss mitigation can include temporary or ongoing solutions that continue until the end of your loan term. Some options, like a loan modification, short sale, deferral or deed in lieu of foreclosure, only end when the loan is paid off or the house is sold. Other loss mitigation solutions, such as mortgage forbearance, reinstatement or repayment plans, can end as soon as you become current on your payments.
After a loss mitigation, there may be lasting effects, depending on the path you and your lender chose to take. For instance, if you turned your house over to your lender using a deed in lieu of forbearance, there may be a waiting period of several years before you can qualify for certain types of loans.
Another potential consequence of loss mitigation can be deficiencies. If you agree to a short sale significantly below the amount you owe on your mortgage, your lender might try and force you to repay the difference by seeking a deficiency judgment. (Note: this is only allowed in certain states.)
Can I keep my house during loss mitigation?
Some options – like repayment plans, loan modification, reinstatement and deferral – allow you to keep your house during loss mitigation. Other loss mitigation options – such as a deed in lieu of foreclosure or short sale – help you vacate the property to satisfy the mortgage.
Defaulting On Your Mortgage Doesn’t Mean It’s Over
Though the idea of defaulting on your mortgage payment can be stressful and scary, foreclosure isn’t always a foregone conclusion.
Foreclosures are an expensive, time-consuming process that most lenders prefer to avoid. So if you’re having difficulty making your mortgage payment, call your lender to discuss your loss mitigation options. In many cases, loss mitigation can be a mutually agreeable solution that’s beneficial to both you and your lender.
Federal Housing Finance Agency. “FHFA at-a-glance.” Retrieved June 2022 from https://www.fhfa.gov/AboutUs
Consumer Financial Protection Bureau. “Learn about forbearance.” Retrieved June 2022 from https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/help-for-homeowners/learn-about-forbearance/#
Fannie Mae. “Fannie Mae Flex Modification.” Retrieved June 2022 from https://www.fanniemae.com/here-help-single-family/fannie-mae-flex-modification
U.S. Department of Housing and Urban Development. “CARES Act Forbearance Fact Sheet for Borrowers with FHA, VA, or USDA Loans.” Retrieved June 2022 from https://www.hud.gov/sites/dfiles/SFH/documents/IACOVID19FBFactSheetConsumer.pdf