A job loss, pile of medical bills, or other financial hardship can lead a homeowner to face the prospect of foreclosure. In the mortgage-servicing industry, “loss mitigation” is when borrowers and loan servicers work together to lessen the loss when the borrower defaults. The lender, sometimes referred to as an investor, can take on less of a loss by finding alternatives to foreclosure, while the borrower benefits because they can stay in their home.
Types of Loss Mitigation
Lenders and investors, including Fannie Mae, offer a variety of loss mitigation options. Fannie Mae works directly with mortgage servicers so they can assist homeowners who are dealing with temporary financial hardship. The most common types of loss mitigation are:
- Forbearance: Mortgage payments are reduced or suspended temporarily. In forbearance, the servicer agrees not to initiate foreclosure, and the borrower must resume payments when the forbearance period ends. You can either pay the amount owed in full or add extra amounts to monthly payments until the skipped amount is completely repaid.
- Repayment Plan: Can help you catch up if you’ve missed a few mortgage payments. This agreement lets you pay delinquent amounts over a certain amount of time. Typical repayment periods are around three to six months, after which you resume making payments per the original terms of the loan.
- Loan Modification: Is when the loan is permanently restructured with changes such as a lower interest rate, extension of its term, or conversion from a variable interest rate to a fixed interest rate. In some cases, the lender can forbear part of the principle balance to be set aside and paid as a balloon payment upon loan maturity or if the home is sold or refinanced.
If you are willing to give up your property and avoid foreclosure or a deficiency judgement, a short sale or deed in lieu of foreclosure can help.
How to Proceed with Loss Mitigation
Loan services are required by federal law to help a borrower with loss mitigation if they’re more than 45 days delinquent on a mortgage payment. They must appoint someone to inform you of available programs and how to submit a loss mitigation application. Other requirements include informing you of the application’s status, how to appeal a denial, and what criteria would result in initiating the foreclosure process.
Your options depend on your situation and who issues or backs your loan. If a short-term repayment plan is all you need to get back on track, a loan servicer may work with you over the phone. Applications are often required for long-term plans. To apply for loss mitigation:
- Reach out to your loan servicer and speak to someone in their loss mitigation or home retention department.
- Find out what documents they need and how the application process works
- Submit your application as soon as possible.
Loss mitigation forms typically require you to provide personal information and details on your mortgage and property. Pay stubs or a profit and loss statement, copies of bank statements, and recent tax returns are also required, as is a financial worksheet that breaks down your income and expenses. You’ll also have to submit a hardship statement or affidavit that explains your situation.
Work with Your Foreclosure Attorney
Preparing a hardship package with your lender helps them determine suitable options for you. If the process isn’t clear, contact our foreclosure lawyer in Los Angeles who can guide you in taking the right steps and ensure your lender follows the proper course of action. At OakTree Law, we understand the complex process of foreclosure and loss mitigation, and will help find a financial solution that works best for you. Call 888-348-2609 or request your free evaluation today!