Defaulting on mortgage payments could prompt your lender to initiate a foreclosure proceeding against you. If you’re unable to get caught up on payments, that could result in the loss of the home. Before things get that far, however, your lender might offer some loss mitigation options to head off the foreclosure. There are different strategies for loss mitigation mortgage lenders may pursue, including forbearance, a deed-in-lieu or a short sale.
If you’re interested in buying a home, a financial advisor could help you create a financial plan for your needs and goals.
Loss mitigation refers to a set of options that lenders may offer to borrowers in order to avoid a foreclosure proceeding. Foreclosure can be damaging to consumer credit scores and cost you your home but it’s also problematic for lenders. The various costs associated with foreclosing on a property can eat into profit margins. Not to mention, the lender now has to try to sell the home as quickly as possible.
Through loss mitigation mortgage lenders or servicers can help borrowers find solutions that can either keep them in the home or get out of the mortgage without having to resort to foreclosure. Federal mortgage servicing laws require that in most cases, loan servicers must begin loss mitigation once a borrower is 45 days delinquent on their payments. Borrowers must be notified of their options in writing or by phone.
Even if you’re not at the 45-day mark yet, you can reach out to your mortgage lender or loan servicer to ask about help with loss mitigation if you’re having trouble affording your mortgage payments. The sooner you connect with your lender, the more options you may have for avoiding foreclosure.
When someone falls behind on their mortgage payments, their lender or mortgage servicer will assign either an individual or group of individuals to help them through the loss mitigation process. Again, if you’re the borrower then the lender or loan servicer should give you notice that this has been done so you can stay in contact with the person or team assigned to your case.
Your loss mitigation specialist or team has several duties, including:
Depending on the lender or loan servicer’s policy you may or may not need to submit documentation to apply for loss mitigation. If you do need to complete an application, the lender should send you the forms you need.
You’ll have to fill those out, providing information about yourself and your mortgage. You may also need to provide copies of your bank statements, recent pay stubs, tax forms and a financial statement or budget. In that sense, applying for loss mitigation is similar to applying for a mortgage.
If your inability to pay the mortgage is due to financial hardship, you may also be asked to provide a written explanation. For example, if you’ve fallen behind on mortgage payments because of a job loss you’ll need to detail when you lost your job and your efforts to find work since then. Or if you haven’t been able to pay because of an illness that’s kept you from working, you may need to provide a statement from your doctor attesting to that.
Generally, loss mitigation is designed to help homeowners avoid foreclosure. The federal government recognized the need for loss mitigation strategies to avoid a repeat of the 2008 housing crisis. Together, the Treasury Department, the Federal Housing Finance Administration and the Department of Housing and Urban Development created a framework for loss mitigation that emphasizes:
In terms of what loss mitigation options lenders or loan servicers can offer, there are several possible solutions available.
First, lenders might offer a forbearance period. Forbearance allows you to temporarily pause mortgage payments for a time until you’re able to resume making them. Any missed payments may be added on to the end of the loan term, which means you’ll be paying the mortgage longer. But forbearance can ease some of the financial pressure until you’re caught up.
Lenders may also allow you to add on missed payments to your current loan, without taking a forbearance on current payments. This can be structured as a deferral (also referred to as a partial claim) or a repayment plan. The difference between them lies in how they’re repaid.
With a deferral or partial claim, the lender gets repaid those missed mortgage payments when you sell the home or if you refinance the loan. With a repayment plan, missed payments are added to your current payments for a set time period. You don’t have to extend your loan term or pay anything out of your profits when you sell but you will temporarily increase your monthly mortgage payments.
Lenders may offer loan modifications in cases where the terms of your mortgage are not workable for your budget. Loan modifications allow for the restructuring of the loan so that you can get caught up on missed payments and potentially have a more affordable payment to make going forward. Keep in mind that if the loan term is extended you may have a lower payment but you’ll pay more for the home over the long term.
In cases where the likelihood of foreclosure is high, the lender or loan servicer may suggest a short sale or deed-in-lieu of foreclosure if all other loss mitigation efforts fail. A short sale allows you to sell the home for less than what’s owed, with the agreement of the mortgage lender.
A short sale allows you to walk away from the home with less damage resulting to your credit score compared to a foreclosure. It’s important to note, however, that depending on where you live the lender may still hold you responsible for paying the difference between what the home sells for and what’s owed on the mortgage.
A deed-in-lieu of foreclosure essentially means you sign your ownership rights to the home over to the lender. You don’t have to go through foreclosure since you’re giving up your claim to the deed, but the lender does have to approve.
Deed-in-lieu can have a negative impact on your credit, though again, it’s generally not as bad as foreclosure or bankruptcy. And again, you should be aware that the lender may still require you to pay what’s owed on the mortgage. Talking to a mortgage expert or even your financial advisor can help you decide whether either of these options makes sense for your situation.
Loss mitigation can help you to stay in your home if you’re facing the prospect of foreclosure. Keeping the lines of communication between yourself and your lender or loan servicer open is often the best way to avoid a situation in which you risk the loss of your home.
Photo credit: ©iStock.com/AntonioGuillem, ©iStock.com/ArtistGNDphotography, ©iStock.com/PeopleImages
Rebecca Lake, CEPF®Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.
Read More About Mortgage
Fair Housing laws." />
More from SmartAsset
SmartAsset Advisors, LLC ("SmartAsset"), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. Securities and Exchange Commission as an investment adviser. SmartAsset's services are limited to referring users to third party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States that have elected to participate in our matching platform based on information gathered from users through our online questionnaire. SmartAsset receives compensation from Advisers for our services. SmartAsset does not review the ongoing performance of any Adviser, participate in the management of any user's account by an Adviser or provide advice regarding specific investments.
We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.
This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.
