What is loss mitigation?

Loss mitigation is a general term that is used to reduce or eliminate financial loss for both the lender and the borrower. The goal of loss mitigation is to prevent a property from going into foreclosure. Foreclosures are the last resort for both the homeowner and the lender. The homeowner's credit rating is devastated by foreclosure. It takes at least three years after a foreclosure for the homeowner's credit rating to be repaired. Additionally, when a home goes into foreclosure, the owner, who may have monthly payments for years, loses all of the equity he had in the home.

For the lender, foreclosure is bad business. Although they end up with an asset, the home, banks and mortgage companies are not real estate companies. They are not set up to maintain a property and get it sold. The bank, when they take ownership of a home through foreclosure, they typically attempt to re-sell it as quickly as possible, with no thought to maximizing their profits.

With both the homeowner and the lender attempting to avoid foreclosure, the field of loss mitigation developed. There are a variety of programs in place to help those who have lost their jobs, experienced a medical emergency or gone through a divorce hold onto their home and prevent foreclosure. Because each person's financial situation is unique, the best choice for one person may not make sense for someone else. A real estate attorney can be a smart investment for the person trying to hold onto their home.

Ways that the homeowner can keep the home

If the homeowner got behind on their mortgage payment for some reason, but are generally able to make the payments and afford the home, there are a variety of programs that can help. A loan modification is a situation where the existing loan contract is rewritten in a manner that allows the homeowner to continue to service the debt. The changes to the loan are permanent, and extend after the homeowner gets back on their feet financially.

A partial claim is when the lender advances the borrower funds to pay up the delinquent amount of the mortgage, making it current. The partial claim loan is typically interest free and is not repaid until after the mortgage is paid off. The lender may also offer the borrower an opportunity to increase the amount of their monthly loan so that they can bring their mortgage current over a period of time. The homeowner may also qualify for forbearance, where the monthly payments are suspended for a period of time. This gives the homeowner time to catch up on monthly expenses and start fresh, without paying late fees.

What happens when the homeowner cannot afford to keep the home

Sometimes financial difficulties are more than short term problems. In a situation where the homeowner finds himself unable to service the loan, and with little to no chance of servicing the loan in the future, it may be necessary for the homeowner to give up the home. There are a variety of programs that the homeowner can participate in that allows him to move out of the home, eliminate his mortgage and avoid foreclosure.

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