What Does “Loss Mitigation” Mean?

"Loss mitigation" is what the mortgage-servicing industry calls the process where borrowers and their loan servicer work together to avoid a foreclosure.

The term 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 an investor must bear in the foreclosure process, loss mitigation is supposed to benefit the investor. Loss mitigation is also meant to help 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 a foreclosure.

What Is Loss Mitigation?

Again, "loss mitigation" is the process in which borrowers and their loan servicer work together to avoid a foreclosure.

What Happens in Loss Mitigation?

To apply for loss mitigation, contact your servicer's loss mitigation department, sometimes called the "home retention department" or something similar. Ask them to send you a loss mitigation package (application).

You'll have to fill out the application and provide some supporting documentation to your loan servicer, such as pay stubs, bank statements, and tax returns (see below). The servicer will review and evaluate your application materials and let you know if you qualify for any loss mitigation options.

If the servicer denies your application for loss mitigation, it must inform you in writing why your application was denied, such as you don't qualify for a modification because your income isn't high enough to support a modified payment amount or you've already used all available loan modification options.

What Are Some Loss Mitigation Options?

By applying for a loss mitigation option, you might get a solution to avoid a foreclosure and maybe even keep your home. For example, if you want to stay in your house, you might qualify for a forbearance, repayment plan, loan modification, partial claim, or deferral. Or, if you can come up with the funds, you can reinstate the loan or redeem your home before or, depending on state law, after the foreclosure.

If you'd like to give up the home without going through a foreclosure, you might be able to complete a short sale or deed in lieu of foreclosure.

Stop Payments With a Forbearance

With a forbearance plan, you won't have to make any payments, or you make smaller payments, for a specified amount of time.

Get Caught Up Through a Repayment Plan

In a repayment plan, you pay extra each month (more than your regular monthly payment amount) to get caught up on overdue amounts.

Get Caught Up With a Reinstatement

To reinstate your mortgage, you must pay the past-due amounts, including missed payments, interest, late fees, and foreclosure costs, in one lump sum. After you reinstate the loan, you resume making your regular payments.

Get a More Affordable Payment With a Loan Modification

A loan modification adjusts the loan's terms, such as your loan's interest rate or term (length). Usually, the goal of a modification is to make your monthly payments more affordable. Also, the lender typically brings the loan up to date by adding past-due amounts to the debt balance as part of a loan modification.

However, in some cases, and depending on the modification's terms, your monthly payment might actually increase.

Get Current With a Partial Claim or Deferral

You might qualify for a partial claim if you have a specific type of loan, like an FHA-insured mortgage. Generally, a "partial claim" is an interest-free loan to get current on overdue mortgage payments.

You don't have to pay the loan back until your first mortgage matures or when you pay off the first mortgage, like when you sell the property or after a refinance. You don't have to make any payments on the partial claim loan until then.

Similarly, in a deferral, the lender defers repayment of delinquent amounts until the home loan ends.

Sell Your Home Through a Short Sale

A "short sale" is when a lender agrees to let the homeowner sell the home to a new owner for less than what's owed on the mortgage.

If your home is worth more than you owe, you don't need to do a short sale. You can sell the home, pay off the mortgage and any other liens on the property, and pocket the rest.

Give Your Home to the Lender With a Deed in Lieu of Foreclosure

With a deed in lieu of foreclosure, the lender agrees to accept a deed to the property instead of foreclosing.

What Are the Laws on 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 must also 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 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 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.)

How to Apply for Loss Mitigation Even Earlier

To apply for loss mitigation, contact your loan servicer. It's critical to contact your servicer when you think you might have trouble making your upcoming mortgage payments. You can usually find the contact information for the loss mitigation department on your monthly mortgage statement or the servicer's web page.

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 usually must fill out and submit a loss mitigation application to the servicer (see below).

Some States Have Loss Mitigation Laws

Under some state laws, a foreclosure must stop if you apply for loss mitigation.

How Can I Apply for Loss Mitigation?

If your servicer says you must apply a loss mitigation option, it will send you a "loss mitigation package." (Sometimes, you can get a foreclosure alternative without completing a full application.)

The package will contain information about what documents you must return to the servicer and 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 details, 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 and 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.

The information you'll need to provide varies from servicer to servicer, so be sure you understand exactly what your servicer needs to assess your application.

Generally, federal law requires the servicer to evaluate your application for all loss mitigation options within 30 days, as long as you submit the complete application more than 37 days before a foreclosure sale.

How Does Loss Mitigation Affect Your Credit?

Your credit scores will probably go down after participating in loss mitigation, depending on what option you get. But your scores were already damaged if you were behind on mortgage payments.

Foreclosures, short sales, deeds in lieu of foreclosure, and bankruptcy are all bad for your credit. Bankruptcy is worse. A loan modification might not be so bad, depending on how the lender reports the modification to the credit bureaus.

However, your credit might remain relatively unscathed in a few situations, such as if you get mortgage relief after a natural disaster. And once you get caught up on the mortgage loan and resume making on-time payments, your credit will improve.

Can I Delay a Foreclosure By Submitting a Loss Mitigation Application?

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 begin a foreclosure or move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, 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, under federal law, 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.

How Long Does Loss Mitigation Last?

Generally, the servicer must review a completed application within 30 days. Be sure to submit your application more than 37 days before a foreclosure sale.

But loss mitigation is often an ongoing process that lasts even after you've submitted an application and the servicer has provided you with a loss mitigation option. For example, if you get a forbearance, you might need further help with your mortgage payments, perhaps in the form of a loan modification after the forbearance ends.

What Are Some Other Options to Save My Home From Foreclosure?

Redeeming the home will also stop a foreclosure.

Equitable Right of Redemption

Before your home is sold at a foreclosure sale, you get an "equitable right of redemption."

With the equitable right of redemption, you get the right to pay off the mortgage debt in full, plus any damages the lender suffered due to your nonpayment, like collection fees, court costs, and attorneys' fees in its foreclosure action, at any time after default but before a foreclosure sale. Redeeming stops a foreclosure.

If you redeem before the foreclosure sale, you'll own the property outright with no mortgage.

Statutory Right of Redemption

In some states, foreclosed homeowners also get the right to get the property back within a limited time after a foreclosure sale. This right is called the "statutory right of redemption."

With statutory redemption, you must reimburse the purchaser from the foreclosure sale the price paid, plus certain lawful expenses. Or in some states, the redemption price is the total amount of the mortgage debt. The laws in your state specify how much you have to pay and how long you have to redeem the property if you get that right.

Talk to an Attorney

If you want to learn more about how foreclosure works, including loss mitigation options and your rights under federal and state laws, consider talking to a foreclosure attorney. An attorney can also help you navigate your servicer's loss mitigation process.

A HUD-approved housing counselor is another valuable source of (free) information about loss mitigation options.