The term “loss mitigation” refers to a loan servicer’s duty to mitigate or lessen the loss to the investor (the loan owner) resulting from the borrower’s default. Given the costs that an investor must bear through the foreclosure process, loss mitigation is intended to be beneficial for the investor.

Loss mitigation is also supposed to be beneficial for the borrower. Some loss mitigation options—such as a loan modification, forbearance agreement, and repayment plan—allow the borrower to stay in the home. Other options, like a short sale or deed in lieu of foreclosure, help a borrower give up the property without going through foreclosure.

Servicers Have to Help Delinquent Borrowers With Loss Mitigation

Under federal mortgage servicing laws, in most cases, by the time a mortgage payment is 45 days’ delinquent, the servicer must appoint personnel to help the borrower with loss mitigation. (Servicers also have to inform borrowers about available loss mitigation options in writing and over the phone, if possible and appropriate.)

Specifically, the servicer must assign a single person or a team that’s accessible to the borrower by phone, who can respond to inquiries and work with the borrower through the loss mitigation process. The appointed personnel must be able to advise the borrower about:

• available loss mitigation programs
• how to submit a complete loss mitigation application
• the status of a submitted loss mitigation application
• how to make an appeal (if the application is denied), and
• the circumstances when the servicer may refer the account to foreclosure. (To get an overview of how foreclosure works in your state and find links to articles covering state foreclosure procedures, see our Key Aspects of State Foreclosure Law: 50-State Chart.)

With some loss mitigation options, like a short-term repayment plan, your servicer might be able to evaluate you over the phone and provide an immediate approval. For a more long-term solution, like a loan modification, you’ll need to fill out and submit a loss mitigation application to the servicer.

Submitting a Loss Mitigation Application

If your servicer tells you that you need to formally apply for loss mitigation, it will send you what’s called a “loss mitigation package.” The package will contain information about what documents you’ll have to return to the servicer, along with some forms to fill out.

Typically, as part of the application, you’ll need to provide:

• a completed application form, which includes your personal information, mortgage information, property information, and so forth
• copies of your latest pay stubs or a profit and loss statement if you’re self-employed
• copies of your bank statements
• your recent tax returns
• an income/expense financial worksheet showing how much money you bring in and where you spend it, and
• a hardship statement or affidavit that explains why you’re having financial difficulties.

Submitting a Complete Loss Mitigation Package Can Delay Foreclosure

Under federal law, if you send the servicer a complete loss mitigation package before a foreclosure starts or more than 37 days before a foreclosure sale, the servicer can’t proceed with the foreclosure until:

• it informs you that you’re not eligible for any loss mitigation option (and any appeal has been exhausted)
• you reject all loss mitigation offers, or
• you fail to comply with the terms of a loss mitigation option, like a trial modification.

Be aware that the servicer generally doesn't have to review multiple applications. But if you bring the loan current after submitting an application, you may submit another.

Talk to an Attorney

If you want to learn more about how foreclosure works, including the loss mitigation process, as well as your rights under federal and state laws, consider talking to a foreclosure attorney. If you can't afford a lawyer, a HUD-approved housing counselor is another useful source for information.

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