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Can I Save My Home? Loss Mitigation Strategies That Work

You don’t have to lose your house. Read through this guide to learn the best strategies to keep your home.

How to Avoid Foreclosure

To buy a home is to invest in one’s future. Naturally, one of a homeowner’s greatest fears is the possibility of losing their home if they fall on hard times. Those afraid they will be unable to make monthly payments consistently may be hesitant even to consider purchasing a home. Talking to a mortgage lender can help to alleviate those fears.

Financial hardship does not automatically result in foreclosure. There are several ways to avoid foreclosure and keep the home, even when a borrower is struggling to keep up with their mortgage payments. Remember that no one benefits from a foreclosure. The mortgage lender also suffers a financial loss in that scenario, which means that it’s in their interest to help keep people in their homes. Mortgage servicers help their clients by offering options referred to as “loss mitigation strategies.” These may permit a borrower to get into a better position to continue making mortgage payments.

What is Loss Mitigation?

Loss mitigation refers to strategies or programs used to help a borrower struggling to make mortgage payments. Servicers employ these strategies to give homeowners a chance to keep their homes when they have difficulty with the expense. These programs exist for the benefit of both parties, as foreclosures are costly and time-consuming for lenders and result in lost revenue.

In addition to the immediate financial incentives, loss mitigation strategies play a role in the overall economy. Because the housing market directly influences the economic landscape, the government has a vested interest in preventing foreclosure. The 2008 housing crisis was due in part to the lack of mitigation strategies among servicers. To promote and preserve homeownership, the United States government created the Servicing Alignment Incentive, a range of policies to help servicers resolve delinquencies more consistently and efficiently. The focus was to keep borrowers in their homes and minimize loss for lenders.

Starting the Process

Before we get into the various methods available to save a mortgage, you may be wondering how the process of loss mitigation even begins. It all starts with the lender. The first step would be to reach out and explain your unique situation, including whether or not you can afford payments. Be sure to mention if your finances were impacted by COVD-19, as that may qualify you for protections through the CARES Act. (You can learn more about the CARES Act in this forbearance article.)

Once you’ve spoken with your servicer, they will connect you with a loss mitigation specialist. The specialist will analyze the specific situation and determine the best options for moving forward. They will offer guidance on how to submit a loss mitigation application and the kind of information that will be required.

The loss mitigation application may require a significant amount of documentation, including:

  • Completed application
  • Personal information
  • Property information
  • Pay stubs
  • Tax returns
  • Financial statements
  • Hardship statements (letters stating the nature of your financial hardship)

Loss Mitigation Options

As outlined below, there are several loss mitigation options available. A lender will tell you which one is best for an individual situation.

A repayment plan may be a viable solution when payments are missed due to temporary hardships such as an illness or job loss. Your lender or servicer will modify the loan and add structured payments to make up for the missed ones. This strategy allows a borrower to “catch up.” For borrowers who are confident they can continue to meet their financial obligation, this may be the best choice.

Forbearance is another option designed to alleviate temporary hardships. It differs from a repayment plan in that it is typically for an extended period. Depending on the terms of the agreement, a forbearance may allow the borrower to miss payments or pay a reduced monthly amount for a specified number of months or even years.

Reduced payments can help a borrower get their financial affairs in order before resuming full payments. The servicer and borrower can then negotiate how to handle the making up of missed payments. One possibility is to add payments to the end of the loan, effectively extending its terms to make up the remaining difference.

A flex modification or loan modification changes the payment schedule to reduce mortgage payments. This modification helps borrowers whose financial situation has changed when they can no longer afford the amount of their mortgage. The modification can take several forms, including an adjusted interest rate, an extension on the loan term, or adding the overdue payments to the loan balance. Flex modification allows the borrower some flexibility in payments so they can remain in their home.

What If I’m Not Approved?

Maintaining a good relationship with your mortgage lender is always a best practice. While it’s always in their best interest to help a borrower, servicers are more likely to extend loss mitigation options to homeowners with a consistent payment history and no previous complications. Ultimately, it is the servicer’s choice to offer loss mitigation assistance or not.

If, for some reason you don’t receive approval for a loss mitigation program, foreclosure isn’t the only option that remains. There are still a couple of other ways to get out of a mortgage, although they both result in a loss of the home.

Short sales allow for the sale of the property for an amount that is equal to or less than the current outstanding balance on the mortgage. The lender would receive all proceeds from the sale to forgive the loan, typically even if the final sale doesn’t cover the full amount that is outstanding. In some cases, though, the borrower would still have to pay the difference. A short sale avoids foreclosure, which protects the borrower’s credit, but they do not get to remain in the home.

Deed in lieu of foreclosure refers to an official document that transfers the homeowner’s title to the lender. Essentially, the borrower gives the home to the bank in exchange for a clean break. The lender allows the borrower to get out of the mortgage with their credit intact while they assume ownership of the home to resell it. As in the case of a short sale, the borrower does not get to keep the house.

How to Prevent Loss Mitigation

Ideally, a homeowner should do everything within their power to avoid having to go through the loss mitigation process. Not only does it affect their standing with the lender or servicer, but it also has profound credit implications. While not all hardships are preventable, some advanced planning can put a borrower in a better position to handle financial setbacks.

You’ve likely heard the phrase “live within your means” countless times before. It should be the mantra of every homeowner. On Q Financial recommends that the first step of any prospective homebuyer is to figure out how much you can afford. An expert On Q Financial Mortgage Consultant will be the first to explain that the debt-to-income ratio is a determining factor in securing a loan.

This is because your lender wants you to keep your home. Responsible homeowners will make an effort to budget, save, and avoid excessive debt so that they are prepared to weather a crisis. Having a healthy savings account can make a massive difference when hardships occur, and strict budgeting may be enough to keep a savvy borrower from having to reach out to their servicer for loss mitigation in the first place!

Should I Refinance My Home?

Once a borrower is already facing financial hardship, it may be too late to attempt a refinance, especially if payments are being missed. However, if a homeowner is in good standing (no missed payments within the past year) and knows they won’t be able to afford their current loan structure, refinancing may be an option.

Refinancing can allow you to modify the interest rate and the loan term or even to access equity for debt consolidation or home repairs. Refinancing before falling behind may help you avoid loss mitigation by adjusting to more realistic terms. Reach out to an expert On Q Financial Mortgage Consultant to learn if refinancing is right for you.

Keep Your Home

A mortgage lender wants you to be successful. Loss mitigation strategies are designed to keep homeowners in their homes, and the programs work. If you’re concerned about losing your home, call your servicer immediately.

On Q Financial knows there is no one-size-fits-all mortgage. If you’re ready to look into a new home, contact one of our expert On Q Financial Mortgage Consultants to learn more. Our mortgage consultants are here to help you find options tailored to your specific needs. The best part is our Mortgages Simplified™ journey means less stress and more ways to say yes!

Reach out today or check out our easy-to-use calculators to determine how much you can afford!