Loss Mitigation: What It Is, How It Works

Dori Zinn is a personal finance journalist with more than a decade helping people understand money. Her work has appeared in Wirecutter, CNET, Credit Karma, Huffington Post, and more.

Betsy began her career in international finance and it has since grown into a comprehensive approach to journalism as she's been able to tap into that experience along with her time spent in academia and professional services.

What Is Loss Mitigation?

Loss mitigation is a process in which your mortgage lender works with you on a repayment plan if you’re struggling to make payments. There are a few different options within loss mitigation to help borrowers stay in their homes even if they are having trouble with mortgage payments to avoid foreclosure.

Key Takeaways

• Loss mitigation helps you avoid foreclosure through options like loan modification, forbearance, and short sales.
• You must meet specific eligibility criteria based on financial hardship to qualify for loss mitigation.
• The application process for loss mitigation requires thorough documentation and communication with lenders.

Understanding Loss Mitigation

If you’re having trouble making your mortgage payments—whether you lost your job, were affected by a natural disaster, etc.—you might be able to get assistance through loss mitigation.

Loss mitigation is a way for mortgage lenders to help borrowers struggling to make payments remain in their homes. It might not be available in every situation, but it could help some people who are struggling to make home payments and need financial assistance. Below is a list of steps you can follow should you need to apply for loss mitigation.

1. Contact your lender: When you know you’re going to have problems making your mortgage payments, contact your mortgage lender. Let a representative know you’re struggling. They’ll review your options, which may include loss mitigation.
2. Complete a loss mitigation application: You'll then have to complete an application in order for your lender to determine whether you’re a good fit for loss mitigation. Applications typically ask for detailed financial information, but the types of questions will vary by lender. You’ll have to explain why you’re requesting assistance and if there are any current liens on your home.
3. Include paperwork: You might have to provide specific documents—such as recent pay stubs and bank statements—in your application to prove your financial hardship.
4. Await approval: Your lender has five days from receiving the application to inform you that arrived and that the lender has 30 days to complete an evaluation of your completed application. It might also ask for additional information, along with supplying deadlines for those requests.
5. Review options: If your application is accepted, your lender will outline what loss mitigation options you have, depending on your circumstances. If your application is rejected, you can submit an appeal.

Loss Mitigation Options

As people may experience different hardships, there are a few different loss mitigation options available.

Loan Modification

Loan modification is when your loan servicer alters the terms of your original loan. Loan modification could change your interest rate, minimum monthly payment, repayment terms, or a combination of these. For instance, you could get an interest rate reduction, which lowers your monthly payments. Or you could extend your repayment terms from 30 to 40 years, which would also reduce your monthly payments (though you’d likely pay more interest over the life of the loan).

Forbearance

Forbearance temporarily lowers your monthly payments for a set amount of time, like a few months or years. When your forbearance period is up, you’ll be required to make any missed payments. However, you might be able to get a flexible loan modification or repayment plan to help you pay the outstanding amount.

Payment Deferral

If you’ve missed any of your monthly payments, a payment deferral will move those past-due amounts to the end of your loan. You’ll most likely continue making your regular monthly payments from then on, though any missed tax and insurance payments may affect whether this will be the case.

With a payment deferral, you’re still responsible for those overdue payments—usually without getting charged extra interest—at the end of your loan terms, when you refinance, or if you sell your home.

Repayment Plan

Repayment plans take the balance of your past due amounts and add it to your current mortgage payments, split across several months to make payments more reasonable. You’ll make these new monthly payments until your mortgage is current.

Reinstatement

Reinstatement is when you pay all your outstanding balance in one lump sum, bringing your mortgage up to date. It's mainly for borrowers who previously fell behind on payments and can now afford to repay what they owe. However, it might not be the best option for those who need immediate financial assistance with their mortgage.

Short Sale

A short sale refers to when you sell your home for less than the remaining balance on your mortgage. It happens when homes lose value, and it allows you to get out of your mortgage without facing foreclosure, while lenders get some of their money back.

How Long Does Loss Mitigation Take?

Loss mitigation can take a couple of months to complete, including 30 days for your application to be reviewed. Everyone’s financial circumstances can be different, so you might get a response within a few weeks, while others might have to wait a few months for a resolution.

Can a Homeowner Reapply for Loss Mitigation if Initially Denied?

If you’re denied loss mitigation, you can appeal. You’ll need to complete an appeal within 14 days of getting denied loan modification and your servicer has 30 days from receiving your application to give you a written response. If denied again, you can’t appeal again. If accepted, you have 14 to accept or reject the offer.

Can I Keep My House During Loss Mitigation?

In most cases, you can keep your home during loss mitigation. But it depends on which loss mitigation option you’re going through. You might be able to keep your home if you take advantage of a loan modification, forbearance period, payment deferral, repayment plan, or reinstatement. If you choose to undergo a short sale or foreclosure, you won’t be able to keep your home.

The Bottom Line

Loss mitigation allows folks facing financial hardships to get help with their mortgage payments. Whether you’re already behind on payments or you’ve run into an unforeseen emergency, loss mitigation could help you keep your home during this difficult time.