The definition of foreclosure loss mitigation, in practice, will depend on the party wishing to mitigate their losses, whether it is a delinquent homeowner or their mortgage lender. From the perspective of the struggling homeowner, loss mitigation is any action taken to save their home, prevent foreclosure, or prevent deficiency liens and other debt obligations. In every case, the ability to mitigate one’s losses depend on the willingness of a lender to negotiate and the individual factors relevant to a given mortgage. From the lender’s perspective, loss mitigation involves negotiations with homeowners to prevent the projected losses the lender foresees occurring should a given property go through the foreclosure and auction sale process.
Loss Mitigation Methods to Prevent Loss of Home
At the onset of default, homeowners will typically take one of the following actions to prevent loss of their home, which can be obtained through negotiations with one’s lender. These negotiated new terms for a mortgage, if approved by one’s lender, can include:
- Special forbearance, which allows a struggling homeowner to miss or make partial payments on their current mortgage obligation for a pre-determined amount of time, typically three to six months. The unpaid amount is then worked back into the life of the home loan or is repaid in a pre-arranged method with your lender
- Loan modification, which entails modifying an existing mortgage in default to make monthly payments more manageable for the homeowner. Though the specific terms and adjustments of each mortgage will vary by lender and home loan, many common adjustments include reductions in the principal balance of the mortgage, lengthening the life of the loan, lowering interest rates, changing variable rate mortgages into fixed rates, and forgiving default fees, penalties, or the defaulted payments themselves
- Loan refinancing, which typically takes place with another lender, however, homeowners may benefit from their current lender offering short refinancing assistance, which reduces the principal amount owed on a mortgage in order for the homeowner to obtain third party mortgage refinancing
- Forms of federal foreclosure prevention relief, including partial claims and other applicable programs, if a homeowner is eligible
Loss Mitigation Methods to Prevent the Foreclosure Process
In other cases, homeowners understand or no longer wish to remain in their current home, but also, want to ensure all mortgage obligations are gone once they leave a given property. The following methods outline potential methods a homeowner can use to prevent the foreclosure process on their home, while at the same time, prevent potential deficiency liens and stabilize future risks a homeowner may realize, had they not done so.
- Deed in lieu of foreclosure, which involves a homeowner voluntarily deeds a property to their lender in exchange for the lender releasing the homeowner from all outstanding mortgage obligations. This must be approved by your lender beforehand.
- Short sales, which involve lenders accepting payoff of existing mortgage debts in amount less than the principal balance once a homeowner has found a third party buyer willing to offer the fair market value for the home.
- Cash for keys negotiations, which is similar to deed in lieu, but includes lenders providing financial incentive to homeowners to vacate their properties without causing damages to the home and allowing both parties to avoid costs of foreclosure
Getting Legal Help with Loss Mitigation
Though almost any loss mitigation method will involve your lender, homeowners should really consult with an attorney for representation and counsel during any loss mitigation negotiations. While lenders can be helpful and informative, they are also seeking to mitigate their own risk. With the assistance of an attorney, homeowners can garner dedicated legal counsel in their own interests, as well as remain informed about all potential options to prevent foreclosure, not just those initially suggested by their lender.
