The mortgage-servicing industry refers to the process where borrowers and their loan servicer work together to avoid a foreclosure as “loss mitigation.” Because a foreclosure usually causes the loan owner (called an “investor”) to take a loss, the mitigation process is supposed to benefit the investor by lessening the loss. Loss mitigation is also supposed to help the borrower.
Some loss mitigation options, like a repayment plan, forbearance agreement, or loan modification, permit the borrower to keep the home. Other alternatives, like a short sale or deed in lieu of foreclosure, allow the borrower to give up the property without going through a foreclosure.
What Are the Different Types of Loss Mitigation Options?
Different lenders and investors offer various kinds of loss mitigation options and have distinct eligibility guidelines for each option. Here are a few of the most common types of loss mitigation alternatives.
Forbearance Agreements and Repayment Plans
Generally, the loan owner will agree to a forbearance if you, for example, broke your arm and can’t work right now, but you’ll return to work as soon as you heal. If resolving that issue takes a few extra weeks, the loan owner might extend the forbearance period.
If you lost your job and fell behind in mortgage payments, but now you’re re-employed and have surplus income, you’ll likely qualify for a repayment plan.
Loan Modifications
If you’re behind on your mortgage payments or are likely to fall behind soon and can’t keep up with your current payments but can afford a reduced monthly amount, you might be eligible for a loan modification.
A modification is designed to lower the borrower's monthly payments over the long term. It also usually helps the borrower get caught up on overdue amounts. Past-due amounts are typically added to the unpaid principal balance, which is then re-amortized over the new term.
Short Sales and Deeds in Lieu of Foreclosure
If you’re ready to give up your property and want to try to avoid a deficiency judgment, the loan owner might agree to a short sale or deed in lieu of foreclosure.
Loss Mitigation Options Depend on the Loan Owner
In most cases, the servicer will decide which option is best for you—you don’t necessarily get to pick, although you might be approved for your first choice—based on your loan type and the investor's guidelines.
Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs, and the U.S. Department of Agriculture’s Rural Housing Service own, insure, or guarantee almost all residential mortgage loans in the United States. Each of these entities offers various options and has different guidelines for their loss mitigation programs.
Once you find out who owns or insures your mortgage loan, you can determine exactly what loss mitigation options are available. To find out who owns or insures your loan, call your servicer.
How to Apply for Loss Mitigation
To apply for loss mitigation, contact your loan servicer, not the owner of your mortgage loan. Someone in the loss mitigation department (sometimes called the “home retention department”) can tell you what options are available and what documents you need to provide, send you an application, and give you details about how the application process works.
You should apply for loss mitigation as soon as possible, either shortly after you fall behind in payments or as soon as you know you’ll have trouble making them (called “imminent default”). By applying and hopefully getting approved for a loss mitigation option early on, you can avoid having foreclosure fees and costs, which can be substantial, added to your total debt. Also, it’s usually easier to work out a loss mitigation option before you get too far behind in payments and before the servicer has referred your loan to a lawyer for foreclosure.
If you’re considering filing for bankruptcy, you should generally submit your loss mitigation application first (assuming you don't need to stop an impending foreclosure sale). After you file, your servicer might say they can’t talk to or help you during bankruptcy, even though it’s untrue.
Watch Out For Dual Tracking
If a foreclosure sale is looming, you must be vigilant to ensure the servicer doesn’t dual-track your loan. While it’s typical for the servicer to go forward with the foreclosure process even after you request loss mitigation, federal law and sometimes state law restricts certain actions, like moving for a foreclosure judgment or order of sale, or conducting a foreclosure sale after you submit a complete loss mitigation application, under specific circumstances.
The servicer generally doesn't have to review more than one loss mitigation application from you. But if you bring the loan current after submitting an application, the servicer has to consider it.
Also, you can ask for a delay of the foreclosure sale so that the servicer can review you for loss mitigation, even if the law doesn’t require it. If the servicer agrees to delay the sale, be sure to get it in writing, and if your foreclosure is judicial, notify the court. You need to verify that the sale is actually canceled; don’t just take the servicer’s word for it.
Fees You Might Have to Pay
Under some program guidelines, the servicer can’t charge you a fee for giving you a modification. But other workout options might require fees.
You can always ask the servicer to waive any fees and late charges. The servicer, however, probably won’t waive its out-of-pocket costs, like an appraisal fee, when modifying a loan. You’ll also have to pay any foreclosure fees and costs. Fees and costs can sometimes be added to the loan balance.
If you work out an alternative to foreclosure, review any fees you’re charged to ensure they’re reasonable and customary. If you think a fee is incorrect or want to learn more about it, you can send the servicer a notice of error or request for information under the federal Real Estate Settlement Procedures Act (RESPA).
Get the Agreement in Writing
Be sure to get the terms of your deal in writing. The loan owner will need to sign the agreement and, in some cases, record it in the county records.
Also, don’t sign a release or similar document that says you’re giving up any legal claims against the loan owner until after you finalize the loss mitigation agreement.
Getting Help With Loss Mitigation
If you need help working out a loss mitigation option with your servicer or want to learn more about your rights under federal and state law, consider talking to a foreclosure attorney. If you can’t afford a lawyer, you might qualify for free help from a legal aid office.
Also, a HUD-approved housing counselor can help you (at no cost) with your loss mitigation application and give you information about different options.
You should, however, avoid for-profit foreclosure rescue companies that offer to assist you for a fee. Scammer companies frequently claim that their services can prevent the loss of your home. But these businesses often leave homeowners in worse shape than before by charging high fees, not doing anything to earn those fees, and even taking steps that hurt the homeowner, like missing deadlines or allowing a foreclosure sale to happen.