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When a borrower fails to make mortgage payments, their mortgage lender or servicer steps in to initiate a process known as loss mitigation. There are several possible loss mitigation options, with varying degrees of impact to the borrower’s financial picture. If you’ve missed several mortgage payments, here’s what to know about loss mitigation and mortgage relief.
What is loss mitigation?
Loss mitigation is the process in which a mortgage lender or servicer offers relief or repayment options to a borrower struggling to keep up with loan payments. Your servicer might refer to this process as “retention.”
While it’s not always possible, the goal of loss mitigation is to avoid the much more damaging process of foreclosure.
Loss mitigation is one of many responsibilities your servicer oversees. (Learn more about the difference between a lender and a servicer.) Ultimately, it’s in the servicer’s best interest to help you repay your mortgage, or at least minimize losses for both parties if foreclosure is the only option.
Loss mitigation options
Depending on the nature of your financial hardship (such as whether it’s short-term or long-term), your servicer might offer you:
Forbearance
Forbearance allows you to temporarily reduce or stop making monthly mortgage payments. The unpaid amount is added to your balance and repaid at an agreed-upon schedule, known as a repayment plan, after the forbearance period expires.
Your servicer might offer you an initial forbearance period of six months, with the option to extend another six months (for a total of one year). When forbearance ends, the borrower typically repays the unpaid amount with their normal monthly payment over a six-month period (or one-year time frame, if the forbearance was extended).
While your mortgage is in forbearance, if you find yourself able to repay the unpaid amount and resume making normal payments, you can contact your servicer to have your loan reinstated.
Deferral
A deferral represents one way to repay the amount you missed in forbearance. With a deferral, you’ll repay the unpaid amount in full at the end of your mortgage term or if you sell or transfer the home, or refinance to a different mortgage.
Loan modification
A loan modification permanently changes the terms of your loan, such as the interest rate or repayment structure, to make the monthly payments more affordable. Depending on the type of mortgage you have, you might be eligible for a combination of a lower rate, a 20 percent or 25 percent reduction to your payment or an extension to your loan term of up to 40 years.
Short sale
In a short sale, your servicer agrees to allow you to sell your home for less than what you still owe on your mortgage. In effect, your servicer absorbs the loss while you move on.
Short sale activity tends to rise when homes lose value. While it’s preferable to foreclosure, both sides still take a hit – the servicer on the mortgage, and the borrower in terms of damage to their credit and no ability to profit from the sale.
Deed in lieu of foreclosure
When you and your servicer agree to a deed in lieu of foreclosure, you transfer the deed to your home to your servicer in exchange for loan forgiveness. The servicer can then sell the home to recoup its loss.
A deed in lieu is similar to a short sale in that you lose your home and harm your credit. Typically, these are last-resort options before foreclosure.
When to submit a loss mitigation application
If you know you’ll miss a mortgage payment, contact your servicer right away to start the loss mitigation process. Your servicer will work with you to review potential relief options and complete a loss mitigation application. It’s crucial to submit this application as early as possible, well before a foreclosure sale date is set.
When completing a loss mitigation application, be prepared to provide information about your financial circumstances, such as bank account details and your budget. Your servicer will give you more exact guidance.
By law, your servicer is required to review your loss mitigation application within 30 days of receipt.
Even with a completed application, however, a servicer isn’t required to offer loss mitigation. If you’re deemed ineligible for loss mitigation, you might be able to appeal the decision within a certain time frame. Your appeal will be reviewed by someone other than the person who initially reviewed your case.
Keep in mind: Most servicers allow a 15-day grace period for late mortgage payments. If you haven’t made your payment by then, you’ll likely hear from your servicer regarding loss mitigation and next steps.
