Before we answer the question what is loss mitigation lets clear up what it means. Mitigation comes from Latin meaning to do soft. The modern meaning is to make softer, make less strong or less damaging. So mitigation of loss then means making loss less severe or damaging.
For the lender this is the action of making the loss on a loan less costly or less financially damaging.
For the homeowner this usually involves either hiring a professional to renegotiate their mortgage or dealing directly with lender to avoid the mortgage foreclosure process.
What Is Loss Mitigation for a Lender?
While dealing with the lender's loss mitigation department may be free, as the name implies, you are dealing with the lender's employees and they have the lender's best interest at heart.
What Is Loss Mitigation for the Homeowner?
While your intentions are in your own best interest when dealing with your lender's loan resolution department, you may mistakenly think your best interests are being served best by dealing directly with the lender as it is "free".
Unless your lender is very helpful, you may be taken advantage of if you think this. For this reason here is where you should consider hiring a professional who works in mortgage loss mitigation and will represent you and your best interests.
Alright, So What Is Loss Mitigation And How Does The Process Work?
Now for the meat and bones of what is loss mitigation. Mortgage loss mitigation works to renegotiate loan terms between the lender and homeowner to avoid the mortgage foreclosure process.
There are six main methods used in the mitigation process with possible variations and combination.
What Are The Mitigation Methods?
Mortgage Loan Modification: This is mortgage renegotiation and loan structuring to new terms that are a permanent change to the loan contract. This is usually done by any combination of the following to lower the monthly mortgage payment:
Lowering the interest rate
Converting variable to fixed interest
Converting an interest only loan to principal plus interest payments (this will increase payment amounts)
Extending the length of the loan (this will the overall cost of the loan)
A principal balance reduction
Forgiveness of payment default and fees, usually by tacking the default amount on to the back end of the loan to make the loan current.
Repayment plans, often proposed by lenders when a homeowner requests a mortgage modification but this is not really a mortgage loan modification and does increase payment amounts for a period of time.
Forbearance: This is a temporary mortgage modification of loan payments and there are several ways this can be done:
No or reduced monthly payments for a period fo time. This could be followed by a repayment plan or loan modification.
Temporarily reduce the interest rate
Convert to interest only payments for a period of time
A principal forbearance where the principal balance is reduced but the amount reduced is still owed when the home is sold, refinances or due as a balloon payment at the end of the loan.
Short Refinance: This is where the lender does a principal reduction so the loan to value will allow another lender to refinance the loan.
Short Sale: This is an option when a mortgage is upside down. The lender will accept a sale price less than the balance of the loan.
Deed In Lieu of Foreclosure: Basically this is signing over title of the home back to the lender to be released from further obligation to the mortgage loan. If done incorrectly the homeowner would still owe the loan balance above the sale price when the lender does sell the home.
Cash For Keys: A variation on the Deed in Lieu of foreclosure where the lender pays the homeowner cash to move out without destroying the property. This avoids the expense in the foreclosure process and eviction proceedings.
What Is Loss Mitigation and How It Can Benefit You
Your lenders loan workout can benefit you, but you must remember it is not a guarantee you will keep your home.
The intention of loan resolution is to negotiate a solution for the lender, that owns an at risk loan, to make the mortgage current and avoid the costly mortgage foreclosure process.
If you keep in mind you are presenting a solution that will help the lender financially, you can work out a solution that will also benefit you. If you cannot afford the loan even after a mortgage loan modification, forbearance or short refinance these are not options available to you and you have to use an option that includes giving up your home.
Yes do try to work out a solution that allows you to stay in your home but recognize when you need to let the house go.
There are times when foreclosure is the best financial solution for the lender. If foreclosure is the best way for a lender to cut his losses then you need to realize you can not keep your home.
So this is the time to negotiate a short sale with your lender, then if you can not sell, negotiate cash for keys with Deed in Lieu of Foreclosure as you last resort. Any of which are better than a foreclosure for both you and your lender.
If you wait to long to negotiate your options the only option left will be a foreclosure sale. You can just do nothing and be evicted from you home even when earlier it was possible to negotiate and keep your home.
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