What Is Loss Mitigation?
October 27, 2023 8-minute read
Author: Kevin Graham
No one ever expects to have trouble with their mortgage payment. But life sometimes brings the unexpected. When that happens, we’re here to help. We’ll guide you through a loss mitigation process.
Loss mitigation is the process of borrowers and mortgage servicers working together to create a plan to avoid foreclosure. This can be done in several different ways, including through forbearance, repayment plans, loan modification, short sale and deed-in-lieu of foreclosure.
What Does Loss Mitigation Mean?
When someone is having trouble making their mortgage payment, the ideal scenario for both a mortgage lender and the homeowner involved is to help the homeowner get back on their feet so they can stay in their home and eventually catch up on their payments. In the event that the home is no longer affordable, loss mitigation can also enable the homeowner to gracefully exit the home and avoid foreclosure.
If you're having trouble making your mortgage payment, you should reach out to your mortgage servicer. Your servicer is the company that you make your payment to. Their job is to not only collect your payment and maintain your escrow account (if you have one), but also to assist you in any payment concerns you may have.
Your servicer may or may not be the same as the mortgage lender you closed your loan with. Servicing rights may be sold and acquired by others. Rocket Mortgage® services the majority of loans it closes.
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Loss Mitigation Options
If you feel there is a chance you might have trouble making upcoming mortgage payments, it's important to reach out to your servicer as soon as possible. They’ll be able to go over any options you may have for relief based on your financial situation.
It's important to note that with any of these options, there’s generally an impact on your credit that can lower your score depending on what led you to need payment assistance. This impact can last until you are caught back up on your payments. However, in all instances, this is better than not dealing with it at all and increasing the chances of losing your home.
There are some exceptions to this general rule. If your request for payment assistance comes after a natural disaster, credit protection is often available from the major mortgage investors.
Regardless of how you eventually catch up on your payment, the first tool often utilized by servicers to provide assistance is forbearance. Forbearance is a temporary pause in your mortgage payment. The goal here is to give you time to get back on your feet financially before having to worry about making your house payment again.
Any payments missed while your payment is paused need to be made eventually. Your options for repayment post forbearance depend on the investor in your mortgage (Fannie Mae, Freddie Mac, FHA, etc.) and the circumstances that led to your payment trouble.
Deferral Or Partial Claim
You may qualify to add all or a number of your missed payments to the backend of your loan. They then get paid back when your house is sold, you refinance or your loan is otherwise paid off. Depending on the investor in your mortgage, you may see this referred to as a deferral or partial claim. From a client perspective, whatever you call it, they work the same way.
Another option you may qualify for when you work with your servicer is a repayment plan. When you’re on a repayment plan, back payments are added to your monthly payment for a number of months until you’ve caught up on what you owe. One thing to know is that this will significantly increase your monthly payment until the plan is complete.
In a loan modification, the terms of your original loan are changed in order to roll your past-due payments into your loan. This brings your mortgage current. The modification may come with a change of the interest rate and/or loan term, but this doesn’t have to be the case. As with all mortgage rates, rates for modifications fluctuate with the market as well.
Depending on the new terms of your loan after the modification, it’s possible for your payment to increase going forward.
Reinstatement involves repaying your past-due payments in one payment immediately on completion of your forbearance. This is the easiest way to bring the loan current and move forward with your current mortgage.
We understand that this isn’t possible for everyone, but there are times when it may be desirable. Perhaps you’ve had to forgo a paycheck for a period at work with the promise of back pay to come at a later date. When your pay comes through, you can pay off your past-due payments and immediately be caught up.
Consider Selling Your Home
If you and your servicer determine there’s no realistic way you’ll be able to afford to stay in your home, the best option for you may be to consider selling it. This is always a difficult decision, but you could pay off what you owe and avoid any credit impacts by going this route in many cases.
If you do have to sell, you should know that it’s a good time to do so. The S&P CoreLogic Case-Shiller index is a rolling 3-month average of home prices in 20 major metropolitan areas across the country. Home prices in February, the latest month for which data was available, showed a 20.2% uptick compared to the same time a year ago.
That, along with very low levels of existing home inventory – every existing home in market would be sold within 2 months at the current pace when a 6-month supply is considered in balance – points to a market heavily weighted toward sellers. You might have the chance to bolster your financial recovery by paying off your mortgage and taking a substantial profit in some cases.
If you won’t be able to get enough out of the sale of your home to pay off your mortgage, you may be able to work with your lender on a short sale.
In a short sale, a lender agrees to allow you to sell your property for less than your remaining mortgage balance. The idea here is that something is better than nothing and it allows the lender to recoup some losses while not going through the time and expense of a foreclosure. It’s important to note that your lender has to agree to this, and they approve all offers.
Borrowers should also know that this can impact their credit, though not as much as a foreclosure. One of the benefits of a short sale is that you can get an FHA loan without the usual 3-year waiting period as long as you haven’t had any late mortgage or installment payments in the year leading up to the sale or in the 12 months prior to your new application.
Finally, depending on the state in which you live, your lender may still be able to hold you responsible for the difference between what the lender gets in the sale and what you owe on the mortgage. It’s something to be aware of if you end up going this route.
Deed-In-Lieu Of Foreclosure
When you execute a deed-in-lieu of foreclosure, you’re handing the rights to your property back to your lender. Although there are still deadlines for you to move out, it may be that this is less traumatic than dealing with everything that goes along with a full foreclosure.
This has to be approved by your lender. In assessing whether this is a viable option, they may look at factors including the value of the home and the amount you owe on the balance.
Additionally, it does have a negative impact on your credit. Depending on state law, your lender may be able to go through the legal system and require you to pay the difference between what they can sell the house for and what you owe.
However, one of the benefits is that you may be able to qualify for a conventional loan in as few as 4 years as opposed to a typical 7-year waiting period. Finally, there are certain circumstances in which your lender may be able to offer you financial assistance, often referred to as “cash for keys,” if you meet certain deadlines in moving out. This may help you in finding a new place to live.
What Is A Loss Mitigation Application?
The application clients make for mortgage payment relief is sometimes referred to as a loss mitigation application across the industry. Rocket Mortgage® clients can fill out our Application for Success.
The application asks for two categories of information from a borrower: You'll be asked to describe the hardship you’re facing that has led you to request assistance. You'll also typically be asked for information that gives a servicer a better picture of your current financial situation.
Documentation that might be asked for would include things like pay stubs, invoices, bank statements and a list of your monthly expenses. The sooner this information is provided, the faster your servicer can evaluate your options.
It's important to contact your servicer as soon as you think trouble might be on the horizon. Your odds of foreclosure increase with each payment you miss. Moreover, being proactive might help you avoid fees. You can be charged a late fee each time you make a payment after the grace period.
Your grace period and payment due date will be included in your mortgage documentation. Generally, if you pay monthly, your mortgage payment is due on the 1st. Rocket Mortgage clients have a grace period of 15 days from the due date.
Loss Mitigation FAQs
Now that you know the basics of loss mitigation, let's answer some frequent questions.
Does loss mitigation hurt your credit?
Loss mitigation options do generally impact your credit in a way that can lower your FICO® Score. If you miss payments and aren’t considered current, the impact on your credit can last at least until you’re current again.
There are instances in which credit protection may be available to you. This may include requests for assistance after a natural disaster.
What happens after loss mitigation?
In many instances, loss mitigation is an ongoing process. After forbearance, loss mitigation remains in effect while you’re on a repayment plan or completing a loan modification.
If you do end up giving up your house in a short sale, deed-in-lieu of foreclosure or a full foreclosure, there are a couple of big things to know after the process is over. To begin with, there’s often a waiting period of anywhere between 2 – 7 years before you can get a mortgage again. The FHA allows for the 3-year waiting period they have to be waived in certain circumstances after short sales as detailed earlier.
Finally, depending on the state you live in, your lender may be able to hold you legally responsible for any remaining balance you owe that’s not paid off in the lender’s sale.
What is the difference between loan modification and loss mitigation?
Loan modification is one possible loss mitigation option in which your past-due payments are added into your loan balance to bring your mortgage current. Loss mitigation refers to all the assistance options available to servicers to help borrowers experiencing payment trouble.
Servicers evaluate these options based on a client’s financial situation and the circumstances that led to their asking for assistance to determine qualifications.
Can I keep my house during loss mitigation?
Whether you're able to keep your home depends on the result of your loss mitigation. If you’re able to resolve your situation through a deferral or partial claim, repayment plan, loan modification or reinstatement, you’ll be able to keep your home.
A short sale, deed in lieu of foreclosure, or foreclosure ends in the loss of your home. Servicers resort to these options only after evaluating all other possibilities.
The Bottom Line
Loss mitigation refers to the process that mortgage servicers go through to try and help clients avoid foreclosure. Foreclosure is always a last resort.
There are various loss mitigation options that may be available depending on your situation and what you can qualify for. These may or may not impact your credit depending on the circumstances that led up to the assistance and the ultimate outcome. However, it’s worth noting that each loss mitigation option is preferable to a foreclosure.
We’re here to help! The sooner you reach out to us, the sooner we can work with you to come up with the best possible solution and get you the assistance you need. Rocket Mortgage clients can fill out an Application for Success. Check out this article for more information on available mortgage help.
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