Falling behind on your mortgage? Here’s how to avoid foreclosure

Mortgage default could prompt your lender to initiate foreclosure proceedings against you. If you fail to catch up on the payments, it could result in the loss of the house. Before things get that far, however, your lender might offer loss mitigation options to avoid foreclosure. There are various loss mitigation strategies that mortgage lenders can adopt, including forbearance, deed in lieu, or short sale.

If you’re interested in buying a home, a financial advisor could help you create a financial plan tailored to your needs and goals.

What is loss mitigation?

Loss mitigation refers to a set of options that lenders can offer borrowers to avoid foreclosure proceedings. Foreclosure can hurt consumer credit scores and cost you your home, but it’s also problematic for lenders. The various costs associated with foreclosing on a property can reduce profit margins. Not to mention that the lender must now try to sell the house as quickly as possible.

Through loss mitigation, mortgage lenders or managers can help borrowers find solutions that can either keep them in the house or get out of the mortgage without having to resort to foreclosure. Federal mortgage servicing laws require that, in most cases, loan servicers begin mitigating losses once a borrower is 45 days past due. Borrowers should be advised of their options in writing or by telephone.

Even if you’re not yet at 45 days, you can contact your mortgage lender or loan servicer for help in mitigating losses if you’re having trouble paying your mortgage payments. The sooner you contact your lender, the more options you have to avoid foreclosure.

How does mortgage loss mitigation work?

When someone falls behind on their mortgage payments, their lender or mortgage agent will designate a person or group of people to help them through the loss mitigation process. Again, if you are the borrower, the lender or loan officer should notify you that this has been done so that you can stay in touch with the person or team assigned to your case.

Your loss mitigation specialist or team has several tasks, including:

  • Explain what loss mitigation options may be available to you

  • Guide you through the loss mitigation application process if a formal application is required

  • Keep you informed of the status of your application

  • Help you appeal if your loss mitigation claim is denied

Depending on the lender or loan officer’s policy, you may or may not be required to submit documents to request loss mitigation. If you need to fill out an application, the lender must send you the forms you need.

You will need to complete them by providing information about yourself and your mortgage. You may also need to provide copies of your bank statements, recent pay stubs, tax forms, and a financial statement or budget. In this sense, applying for loss mitigation is similar to applying for a mortgage.

If your inability to pay the mortgage is due to financial hardship, you may also be asked to provide a written explanation. For example, if you fell behind on your mortgage payments due to job loss, you will need to detail when you lost your job and your efforts to find one since. Or if you were unable to pay due to an illness that prevented you from working, you may need to provide a certificate from your doctor attesting to this.

Loss Mitigation Mortgage Relief Options

Generally, loss mitigation is designed to help homeowners avoid foreclosure. The federal government has recognized the need for loss-mitigation strategies to avoid a repeat of the 2008 housing crisis. Together, the Treasury Department, Federal Housing Finance Administration, and Department of Housing and Urban Development created a loss mitigation framework that emphasizes:

  • Access to assistance for owners who need it

  • Payment relief to make mortgages more affordable

  • Long-term solutions to help avoid chargebacks and defaults

  • Transparency at every step of the process

  • Adequate supervision of all parties involved

When it comes to loss mitigation options that lenders or loan servicers can offer, there are several possible solutions.

First, lenders could offer a forbearance period. Forbearance allows you to temporarily suspend mortgage payments for a period of time until you can start making them again. Any missed payments can be added at the end of the loan term, meaning you’ll be paying the mortgage for longer. But forbearance can ease some of the financial pressure until you’re caught up.

Lenders may also allow you to add missed payments to your current loan, without forbearing on current payments. This can be structured as a deferral (also called a partial claim) or a reimbursement plan. The difference between them lies in the way they are reimbursed.

With a deferral or partial claim, the lender is reimbursed for missed mortgage payments when you sell the home or refinance the loan. With a repayment plan, missed payments are added to your current payments for a set period. You don’t have to extend your loan term or pay anything out of your profits when you sell, but you will temporarily increase your monthly mortgage payments.

Lenders can offer loan modifications in cases where your mortgage terms don’t fit your budget. Loan modifications allow for loan restructuring so you can catch up on missed payments and potentially have a more affordable payment to make in the future. Keep in mind that if the term of the loan is extended, you might have a lower payment, but you’ll pay more for the home in the long run.

Short sales and deed in lieu

In cases where the likelihood of foreclosure is high, the lender or loan servicing agent may suggest a short sale or deed in lieu of foreclosure if all other loss mitigation efforts fail. A short sale allows you to sell the home for less than is owed, with the agreement of the mortgage lender.

A short sale allows you to walk away from the home with less damage resulting to your credit score compared to a foreclosure. It’s important to note, however, that depending on where you live, the lender may still hold you responsible for paying the difference between the sale price of the home and what’s owed on the mortgage.

A deed in lieu of foreclosure essentially means that you give up your ownership rights in the home to the lender. You don’t have to go through foreclosure since you are giving up your right to deed, but the lender must approve.

The deed in lieu can have a negative impact on your credit, although again, it’s usually not as bad as a foreclosure or bankruptcy. And again, you should know that the lender can always ask you to pay what’s owed on the mortgage. Talking to a mortgage expert or even your financial advisor can help you decide if either of these options is right for your situation.

Conclusion

Loss mitigation can help you stay in your home if you’re faced with the prospect of foreclosure. Keeping the lines of communication open between you and your lender or loan officer is often the best way to avoid a situation where you risk losing your home.

Mortgage planning tips

  • Consider talking to your financial advisor about mortgage loss mitigation options that might be most appropriate if you’ve fallen behind on your loan payments. If you don’t already have a financial advisor, finding one doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • Refinancing your home loan could make mortgage payments more affordable if you are able to qualify. When you refinance, you replace your current mortgage with a new mortgage. This could be a good option if you meet the lender’s credit and income requirements and have the ability to lower your interest rate or monthly mortgage payments. Using an online mortgage refinance calculator to work out the numbers can help you decide if this is an option worth pursuing.

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What is a loss mitigation mortgage? appeared first on SmartAsset Blog.

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