Loss Mitigation options to stay out of foreclosure

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If you are behind on your payments and facing foreclosure, you may need loss mitigation help. Loss mitigation options (forbearance, loan modification, etc) help a borrower avoid foreclosure by providing them with alternatives to pay down their mortgage. It also minimizes the lender's credit loss resulting from the borrower's inability to repay the loan.

How do I negotiate for loss mitigation?

Here's an overview of what you should do when you cannot keep up with your usual payments, how to negotiate with the lender, and what actually happens when you are considered for a loss mitigation/loan workout plan.

Contact the lender: Unless you've missed a few payments, some lenders will not negotiate with you for a workout plan. However, if the lender refuses to negotiate unless you're behind, you should keep trying. Contact the lender's Loss Mitigation Department and request a loan workout option to help you pay down the mortgage.

Hardship letter: Prepare a hardship letter including the specific date when the hardship started. Take a look at this Sample Hardship Letter. You should attach documents supporting your hardship claim. Learn more on how to write a hardship letter.

Lender's analysis of your loan: After the lender has agreed to discuss a loan modification, they will send you a packet of forms. They will want you to provide as much information as you can about your finances so they can evaluate your situation using their own calculations. The types of information they are looking for include:
  • 2 months of bank statements
  • Tax filings for past 2 years
  • Receipts of 4 months of regular monthly payments
  • Personal statement about your finances
  • Situation that made you delinquent
  • Paystubs for past 2 months (to check for current ability to pay off loan)
  • Name and contact details of borrower's current employer
  • For self-employed persons, last 2 years of tax information and year-to-date and profit and loss business statement for past 2 years
  • Recent utility bill
The lender reviews the above information, calculates how much you can afford to pay each month and calculates:
  • Monthly net income for past 2 years (adjusted to changes in income)
  • Monthly living expenses (under normal conditions) with debt payments (adjustments are made to reflect rise or fall in expenses for each of the first 3 months of the loss mitigation option)
  • Surplus income available each month by deducting expenses from income
  • Surplus income percentage by diving surplus income by total monthly expense
Based on the above calculations, the lender will approve you for a loan modification and make you an offer. If you cannot afford this offer, you should try to get help from a credit counselor who will be able to help you negotiate. Before sending any documents to the lender, you should make copies in case the documents are misplaced.

What are the loss mitigation options?

Here's a rundown of the workout options available to you in order to avoid a foreclosure.

Special Forbearance

Repayment plan for the borrower to cover the debt and get current on loan until you can make the usual payments through a structured payment plan or loan modification.
  • Suffered verified loss in income and living expenses have gone up, but has enough to cover the debt and become current on the loan.
  • Occupies the property as primary residence.

Delinquent for 3 months but not more than 12 months.

Property should not need repairs which may affect payment under forbearance.

Loan Modification

Permanent Change in terms of the loan - the debt is included in the loan balance and reamortized at a reduced interest rate.
  • Suffered verified loss in income or increase in living expenses but have stable surplus income to help pay at the modified rate and terms.
  • Borrower should remain as the occupant and property should be the primary residence.
  • Borrower having loan at above market rates, lower loan-to-value ratio, and mature terms (loan paid down for 10 years or more).
  • Someone who isn't delinquent but may soon default on the loan.

Behind on payments for 3 months or more and 1 year has passed since the loan was signed.

Property should be in good physical condition; otherwise costs to complete repair work will drain out enough cash and borrower won't be able to make payments under the modification.

Short Sale/ Pre-foreclosure Sale

Sell off property to pay off the debt, though property value has declined to less than the money owed. Know more…
  • Have a verified loss in income.
  • Having negative equity of not more than approx. 63% of the unpaid loan balance.
  • Occupies property as the primary residence.
  • Non-occupant may qualify but have to prove that the need to vacate is related to default.

One who is already behind on payments or likely to be behind soon.

No serious damage to property. Even if damaged, cost of repair should not exceed 10% of the Repaired Appraised Value.

Property should be able to be sold free and clear of liens.

Deed-in-lieu of Foreclosure

Borrower offers property to lender who sells it off to retrieve the unpaid balance. Learn more…
  • One who's unable to continue making payments.
  • Occupies property as their primary residence.
  • Non-occupant owner can qualify, but he has to prove that the need to vacate is related to the cause of default.

The loan is in default (that is, the borrower is more than 30 days late on their payments and the cause of the default cannot be eliminated).

Property should be free of any liens.

Property shouldn't have been used as rental property for more than 1 year.

Partial Claim

Placing your past debts into a subordinate 2nd mortgage (not exceeding 12 months of PITI) payable to HUD (2nd loan payment to begin only after first mortgage is paid down; there's no interest on the 2nd loan).
  • Those having FHA loans and mortgages offered by Freddie Mac approved lenders.
  • Unable to qualify for forbearance.
  • Use property as the primary residence.
  • Can prove that financial hardship is over.
  • May qualify even after bankruptcy filing but court approval required.

Delinquent for 4 months but not more than 12 months.

Property should be in good physical condition.
*N.B: The criteria and conditions stated in the table above may vary from one lender/mortgage company to another.

Of all the loss mitigation options, special forbearance is the best. It may be combined with loan modification when there's doubt about the borrower's income stability. Especially in these tough economic times, if you're unable to get a loan modification, your lender may be open to a short sale or a deed-in-lieu to avoid foreclosure. If you convince your lender to accept a deed-in-lieu you can even talk to the lender about rental options. Whichever option you decide is best to help you avoid foreclosure, you'll need to submit the same documents to prove your hardship.

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Last updated on January 23, 2013

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