Types of Loss Mitigation
For years, loss mitigation has been used by various mortgage companies to help people remain in their homes. But, ever since the latest recession, the housing crisis of 2008, as well as the ever-rising rate of foreclosures in the United States, state government agencies are ramping up on mortgage aid programs encouraging lenders and servicers to use loss mitigation options that would allow borrowers to better afford their mortgages. In extreme cases, where borrowers cannot afford to pay reasonable mortgage payments, loss mitigation options can often help further soften negative effects arising from the headache and heartbreaks of a foreclosure.
So, if you happen to be one of those borrowers who have fallen behind on monthly payments, make sure to be well versed on the different types of mortgage loss mitigation options designed to aid a potentially worse situation.
With this process, a homeowner’s mortgage is modified, with both the lender and homeowner being bound to new terms. The most common modifications include the lowering of interest rates and the extension of the term for up to forty years. Reduction in the principal balance, however, is often rare. Basically, the terms of the original loan agreement are changed in a way that would make it much easier for the borrower to repay the owed amounts.
Government run programs like Making Home Affordable can also be available to borrowers with FHA loans who are 12 months or less in debts, and can combined with a partial claim. Borrowers with conventional and other mortgages not insured by the FHA may have similar loan modification options available through their own lenders.
In order to permit a homeowner to sell the home for actual market value, a lender will accept a payoff that is far less than the principal balance of the mortgage. This option applies specifically to homeowners owing more than the property is worth.
To be considered for a short sale, the homeowner must draft a letter of hardship explaining why they cannot make the payments and why they will not be likely to resume in the near future. Lenders then consider the letter along with the homeowner’s financial documentation before making a final decision to either accept or reject any offers to purchase after the home is listed for sale.
Remember though that short sales damage the credit scores of homeowners, though it does have less of an impact than a foreclosure. Homeowners who choose to take this route often will have no further option than a foreclosure as a last resort.
A lender reduces the principal balance of a homeowner’s mortgage in order to permit the homeowner to refinance with a brand-new lender. The reduction in principal is essentially designed to meet the Loan-to-value guidelines of the new lender, which then makes refinancing possible.
Deed in Lieu
A Deed in Lieu of foreclosure – also known as a DIL—is more of a disposition option in which a mortgagor voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. This type of foreclosure is a special type of deed allowing a borrower in default to transfer ownership of his home to the lender. In return, the lender relieves them of all responsibility for repayment of the mortgage loan. However, a DIL of foreclosure may not always be accepted from mortgagors who can financially make their mortgage payments.
Lenders pay the owner or tenant to vacate the property in a timely manner without destroying the property after foreclosure. This is mostly done by lenders in order to avoid incurring the additional expenses involved in evicting such occupants.
No monthly payments are made with this option. Or there is simply a slight reduction of monthly payments, as forbearance basically allows a delinquent borrower to make up for missed payments by paying a little bit on top of his regular mortgage payment each month until the delinquent amount has been delivered.
Under this option, a mortgagee will advance funds on behalf of a mortgagor in an amount necessary to reinstate a delinquent loan – though it is not to exceed the equivalent of 12 months PITI.
A partial claim essentially makes available a lump sum of money that a borrower can use to make up for missed mortgage payments. There are various different types of claims to consider.
Let Us Help!
It takes more than a blog post to understand the answer to the difficult question of “What exactly is loss mitigation?” Foreclosure is a complicated process that takes time and often provides much heartache and frustration. The very best way to avoid losing your home is to open the lines of communication with your lender and to seek help, successfully creating a plan to manage the entire foreclosure process.
For further help and other questions regarding loss mitigation options, contact Peak Corporate Network. For years, we have brought together America’s top real estate professionals to deliver comprehensive solutions for homeowners, home buyers, private investors, brokers, lenders, agents, and corporate clients. Draw on the power of our network today ! Contact us on Facebook, Instagram, and Twitter!