If you’re behind on your mortgage payments and are in danger of losing your home, know that foreclosure is not inevitable. In many cases, mortgage companies work with struggling borrowers to find foreclosure alternatives through a process called loss mitigation. Some mortgage companies even have dedicated in-house loss mitigation programs. This article will discuss four common kinds of loss mitigation solutions and how they work.
Written by Attorney Paige Hooper.
Updated November 25, 2021
If you’re behind on your mortgage payments and are in danger of losing your home, know that foreclosure is not inevitable. In many cases, mortgage companies work with struggling borrowers to find foreclosure alternatives through a process called loss mitigation. Some mortgage companies even have dedicated in-house loss mitigation programs.
Some loss mitigation options will allow you to keep your house and re-work your debt. Other options will allow you to walk away from a home you can no longer afford while sparing you from the credit damage of a foreclosure sale. This article will discuss four common kinds of loss mitigation solutions and how they work.
Loss Mitigation Options That Let You Keep Your Home
Sometimes, borrowers fall behind on their mortgage payments because of a temporary financial hardship or short-term change in circumstances. For example, an illness or injury that temporarily prevents you from working or a job loss that leads to several months of unemployment could cause you to fall behind on your payments for a short period of time.
Ideally, you’ll be able to catch up on your payments when your situation improves. For many people, though, things aren’t that simple. Late fees, penalties, interest, and escrow payments add up quickly. Your missed mortgage payments may begin to snowball out of control. Soon, your loan servicer may present you with an impossible ultimatum: Pay a huge, unaffordable sum by a certain date or lose your home.
A Bank’s-Eye View Of Loss Mitigation
Your mortgage company doesn’t want you to lose your home, even though it may feel that way sometimes. To better understand how loss mitigation works, take a moment to consider this concept from the mortgage company’s point of view.
Foreclosure proceedings often take a long time and can cost your mortgage company a lot of money. Your lender will likely be the only bidder at the foreclosure auction, which means they’ll end up owning your house. If you’re still living there, the bank may have to spend time and money on removal (eviction) proceedings.
During this process, the mortgage company doesn’t receive money from you or anyone else. It is now responsible for paying real estate taxes, hazard insurance, and property maintenance expenses. Meanwhile, the house continues to decrease in value the longer it remains vacant. When the bank does sell the property, which it will do at its own expense, it’s unlikely that the sale price will be high enough to recoup all of the bank’s losses.
For your mortgage company, it’s much more profitable to keep you in your home and keep collecting payments and interest from you. Although the loss mitigation process is often portrayed as a mere courtesy by banks to help borrowers, it benefits both parties. Understanding this point often helps homeowners negotiate the most favorable loss mitigation opportunities applicable to their unique circumstances.
Forbearance plans are short-term solutions that can help you survive a temporary setback without losing your home. A forbearance lasts for a fixed period of time, usually 3-6 months. During this time, you’ll either pay a lower monthly payment or you won’t be obligated to submit any payment at all.
It’s important to note that these reduced or suspended mortgage payments aren’t forgiven. After the forbearance ends, you’ll still owe the full amount of the payments that were reduced or suspended. How you will repay this amount will depend upon the terms of your agreement with your mortgage servicer. Some potential repayment options might include:
Lump Sum Payment: Repaying the entire delinquency as a lump sum at the end of the forbearance period.
Repayment Plan: Making your regular monthly mortgage payment each month, plus an additional payment toward the past-due amount, until you are current again.
Payment Deferral: The missed payments are added to the end of your loan.
Modification: Your loan terms are modified to absorb the missed payments.
A simple change to the terms of your mortgage agreement is sometimes enough to transform an unaffordable monthly payment obligation into an affordable one. Loan modification is a process whereby your lender permanently changes the ongoing terms of your mortgage to make the monthly payment amount due more affordable. Examples of these changes include: extending the length of your repayment term, replacing an adjustable interest rate with a fixed interest rate, or lowering the interest rate outright, depending on your mortgage company’s modification program.
Keep in mind that loan modification is not the same as refinancing. When you refinance a loan, you take out a new loan to pay off the existing loan. With modification, you’re making changes to the terms of the existing loan.
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Giving Up Your Home To Avoid Foreclosure
Sometimes, the reasons you can’t make your mortgage payments go beyond a mere temporary hardship. Your life circumstances may have permanently changed so that you can no longer afford your monthly payments. You may owe more on the house than it’s worth or the house may need significant repairs that you can’t afford.
There are many situations in which borrowers either want or need to walk away from a financially burdensome home. Sometimes, this is the best option available to a homeowner, for whatever reason.
If you know that you’re going to lose your house, it can be tempting to throw in the towel and allow the bank to foreclose, but fight this urge. But, a foreclosure can be devastating to your credit score. Even if you feel like you’ve reached rock bottom, you’ll eventually be ready to start rebuilding your life. With a foreclosure in your credit history, it could be years before you’ll qualify for another mortgage or a car loan with a decent interest rate.
Even if you’re giving up your house voluntarily, it’s worth working with your mortgage servicing company to find an alternative to foreclosure proceedings. You have several options available to you that may allow you to walk away from your mortgage with your credit score somewhat intact.
If you owe more on your mortgage than what your house is worth, you may want to consider a short sale. In this process, you sell the house to a third-party buyer after receiving permission from your mortgage holder. The sale price is generally equal to the home’s market value, just like a regular home sale. With a short sale, though, the purchase price is not enough to pay off the mortgage and cover all the closing costs.
For the sale to be successful, your mortgage company must agree to accept less than the total loan balance owed. The process can take some time, as the bank must review the buyer’s offer and determine whether this offer represents your home’s true market value.
A short sale is better for your credit than a foreclosure. Ideally, your mortgage company will accept the sale price as payment in full and will report the mortgage as “paid in full” to credit bureaus. This doesn’t always happen. In some situations, the bank can still sue you and get a judgment for the difference between what you owed and the sale price. This is known as a deficiency judgment. It is important to understand which approach your mortgage company will take if you opt to pursue a short sale.
Deed In Lieu Of Foreclosure
Another possible alternative is what’s known as a deed in lieu agreement. With this option, you’ll agree to sign the deed to your house over to the bank instead of going through the foreclosure process. In many cases, you can negotiate with the mortgage company to agree on a move-out date.
Your mortgage company may require you to keep the home in good condition until the move-out date, which will make it easier to sell the house in the future. In exchange, some lenders will agree that they will not sue you for any deficiency balance that may arise.
A deed in lieu agreement is more likely to succeed if your home is in good condition and your homeowners insurance is current. The bank may reject a deed in lieu of foreclosure if the house needs major repairs or if there are other debts, such as tax liens, against the property.
Tips For Success
To succeed, all loss mitigation solutions require voluntary participation and cooperation from both lenders and borrowers. Negotiations with your mortgage provider will work best if you do the following things:
Be proactive. Reach out to your bank about solutions as early as possible, even before your first missed payment, if you can. Don’t wait until the night before your sale date to ask about loss mitigation options.
Do your homework. Even if your lender initially rejects your loss mitigation application, research alternative sources to find other solutions. For example, the Federal Housing Administration (FHA) offers many home-retention solutions for struggling homeowners. It may be helpful to work with a HUD counselor or a private attorney to be sure that you’re pursuing every relevant option.
Keep communication open. Always respond to calls or letters from your mortgage servicer, complete any application forms or other paperwork fully and accurately, and submit all requested documents on time. Be sure to keep copies and records of all communication.
Be realistic. Take the time to honestly assess your situation. Don’t try to convince yourself you can afford a payment that’s too high and don’t agree to any terms that will just delay the inevitable.
If a temporary or long-term change in your circumstances is making it difficult for you to keep up with your mortgage payments, talk to your lender immediately. Ask what loss mitigation options are available to help you avoid foreclosure and protect your credit report. Being open and honest early in the process increases your chances of a successful loss mitigation application.
That said, being open and honest with your lender doesn’t mean that you shouldn’t protect your interests. After all, the bank’s job in loss mitigation is to protect the bank, and the lender is not obligated to agree to any mitigation measures. Some states allow mortgage companies to move forward with foreclosure proceedings even while mitigation negotiations are underway. If you receive a sale notice or court documents from your loan servicer in the mail, don’t ignore them. If you need help navigating your loss mitigation options, an experienced local foreclosure attorney can help you find the best solution.