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 a 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.
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:
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.
If your servicer tells you that you need to formally apply for a mortgage workout option, 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:
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 start a foreclosure or move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until:
Be aware that the servicer generally doesn't have to review multiple applications from you. But if you bring the loan current after submitting an application, you may send another.
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. A HUD-approved housing counselor is another useful source of (free) information.