How Does Loss Mitigation Help Me Save My Home?

If you have stopped making mortgage payments, you have likely entered the foreclosure process. You are probably receiving calls and documents from your mortgage lender telling you to apply for loss mitigation as soon as possible. 

Lenders aren’t really that helpful so you can’t expect your lender to explain the loss mitigation process to you. 

So, it’s your job to educate yourself so you fully understand what loss mitigation means before you start engaging with your lender. First, you’ll want to understand the foreclosure timeline. Next, you’ll want to consider contacting a foreclosure attorney who can help you understand your options as well.

What does loss mitigation mean?

Loss mitigation is the term that your mortgage lender uses to describe ALL the options that become available once you’ve defaulted on your mortgage. 

Loss mitigation options are intended to help you avoid foreclosure.

Once a mortgage lender stops being able to collect mortgage payments, they start taking a “loss” because they are no longer recovering monthly payments. 

In order to handle, fix, or manage the lender’s loss that occurs when you start missing payments, they offer “loss mitigation options.”

Loss mitigation can be helpful for you:

• There are loss mitigation options that can help you keep your home without having to pay back all your missed payments at once
• There are also options to help you walk away from your home without experiencing foreclosure. 

So, while the term “loss mitigation” refers to mitigating the lender’s loss, the options offered can help you resolve the default issue and avoid foreclosure.

What are all the loss mitigation options that you can apply for?

The below options are loss mitigation options. You have to apply and receive your lender’s approval to move forward with one of these options. 

• Loan Modification: A loan modification is a new loan with new terms that allows you to resume mortgage payments without having to pay everything you owe all at once. Usually, your missed mortgage payments get added to your total principal balance and become due at the maturity date of the loan. It is common for loan modifications to offer reductions in interest rates, extended maturity dates, and sometimes – they lower the monthly mortgage payments. 
• Repayment Plan: A repayment plan is an agreement that allows you to resume your regular mortgage payment and pay an extra amount on top of your mortgage payment until you’ve paid back all your missed payments. Once you have paid everything back, you continue making your regular monthly mortgage payment. 
• Forbearance: A forbearance gives you a temporary break in having to pay your mortgage. Once approved for a forbearance, you are allowed to stop payments for the approved months without the lender taking foreclosure action against you. 
• COVID-19 Deferral Agreement: For those of you who were placed on a COVID-19 Forbearance plan (and have Fannie Mae or Freddie Mac as your investor), you may be able to receive a deferral agreement which takes the amount of payments you missed during your forbearance and defers the amount owed to the maturity date of your loan so you can just resume your regular payment. 
• Partial Claim COVID Transition Option: For those of you who were placed on a COVID-19 Forbearance plan (and have FHA as your investor), you may be able to receive a partial claim agreement which takes the amount of payments you missed during your forbearance and defers the amount owed to the maturity date of your loan so you can just resume your regular payment. 
• Short Sale: A short sale allows you to sell an underwater property for less than what is owed on the mortgage. Your mortgage lender approves the sale and then typically waives the deficiency balance (the remaining amount owed) so you can sell your home and move on without owing the remaining balance. 
• Deed in Lieu of Foreclosure: A deed in lieu of foreclosure is an agreement between yourself and your mortgage lender where you sign a document giving the house back to the bank in exchange for the bank agreeing not to foreclose on you.  

Are there any loss mitigation options that do NOT require the lender’s approval?

• Reinstatement: Reinstatement is not included as a formal loss mitigation option by your lender because you don’t have to apply with the bank to be able to reinstate your loan. Reinstatement means that you just pay back everything you missed at one time, in one lump sum (including all late fees or other fees added). 
• Bankruptcy: Bankruptcy is also technically a loss mitigation option but you don’t apply for bankruptcy with your mortgage lender. To file a bankruptcy, you consult and hire a bankruptcy attorney who handles your bankruptcy for you. 
• Selling your home for equity: If you have fallen behind on mortgage payments but you have equity in your home, you can sell your home before foreclosure and walk away with the equity. You do not need your bank’s permission to complete an equity sale of your home, even if you’re behind on payments

What does the document package look like for a loss mitigation option?

Once you’ve defaulted on your mortgage, the bank gets to review your financial information and approve you for the loss mitigation option you want. 

So, to get approved for loss mitigation, you have to apply. The application documents differ slightly depending on who your lender is and what you’re applying for, but a general loss mitigation package consists of the below documents:

• The lender’s loss mitigation application form
• 60-days most recent bank statements for all accounts and all borrowers attached to the mortgage
• 30-days most recent income verification for all income coming into the household (e.g. pay stubs, profit loss statement, SSI income, disability income, pension income etc.)
• Two years most recent tax returns 
• A household expense form 

There can be variations to this list and things you need to be aware of before you submit your package so if you’re considering applying for loss mitigation, it is advisable for you to consult with an attorney. 

Pick the option you’re applying for before submitting your loss mitigation application

It is important that you decide upon your first choice loss mitigation option BEFORE you send in your application documents. That allows you to present your financial information in the most helpful way possible. 

The lender will sound friendly on the phone and will tell you “no big deal – just send in this loss mitigation package so we can help you.” 

But, if you don’t know what you’re wanting and you just blindly send in your application and your financial documents – you run the risk of getting denied for the option you want. 

Some lenders will review you for ALL loss mitigation options at one time. Other lenders make you pick one option to be reviewed for first. It can get a little bit complicated so the more clear you are on what you want, the better chance you have at communicating this to your bank and submitting your documents in a way that reflects what option is best for you. 

Make sure you’re working with your lender’s “loss mitigation” department 

There are tons of different departments and people working for your lender. If you’re applying for a loss mitigation option, the department you need to be working with is the loss mitigation department. 

The people in this department have a much more extensive knowledge base about everything related to loss mitigation so you really only want to get information from them. 

Sometimes, banks will try to block you from being able to talk directly to this department. They will try and route you to a general customer service department, claiming that the customer service representatives are perfectly capable of providing you a good update on your account. 

Don’t fall for this!

The truth is the loss mitigation representatives are much more informed about the process and will give you better, more accurate information. 

So, if you know you’re working on a loss mitigation option or need loss mitigation information – make sure you are always speaking to someone in the loss mitigation department. 

Make sure your loss mitigation file gets “deemed complete”

Regardless of which loss mitigation option you choose, your goal in working with the lender is to get your file “deemed complete.” 

After you submit your documents to the lender, your file will first be reviewed by document processors. The document processors’ job is to confirm that all documents required for a complete package have been received. 

If they are missing items or have questions, they will issue document requests until the file is complete. 

Once the file gets “deemed complete” – the document processors send the complete package to the underwriting department. Then, the underwriters review the documents and complete the review. 

One of the tricky ways that lenders mess with homeowners is by failing to complete the files and send them to underwriting. 

Many homeowners get trapped in a never ending cycle of document requests and “incomplete notices.” 

Solution 1:

Ask them to read you the actual notes attached to the rejection of your documents, not just summarize them for you: One thing that may be causing a problem is that the representative is telling you to just “re-send” something without telling you what the problem is. Often, representatives just say “this document was rejected, resend it” but you need to push back and say “I need to know WHY it was rejected, please read me the actual notes about what’s wrong with it.” They will then tell you the reason. Then, when you send the document again, you can fix the actual issue instead of just re-sending the same thing.

Solution 2:

Use Letters of Explanations to explain unusual things that could be causing the documents to get rejected. Whenever there is something unusual, if banks aren’t made aware of it in writing, they will continue to keep saying that the file is “incomplete.” So if you have something unusual going on with your documents, you need to explain it in writing.

A common example of this is – banks usually request two pay stubs to cover a 30-day period of income information. If you are someone that gets paid only once per month, you will only have one pay stub to give them. They may not check the dates on your one stub and thus keep requesting two pay stubs over and over. You would need to draft and send a letter explaining the unusual circumstance (that you only have one stub but it covers a full 30-days) to get past this document request. 

Solution 3:

Use Letters of Explanations to explain why there is a lack of required document(s): Sometimes, lenders will keep files in an incomplete status because you don’t have something that is required. They will view it as incomplete even if the document doesn’t exist. For example, if you don’t have a bank account, you won’t be able to send in bank statements but unless you send them a letter in writing telling them that bank statements don’t exist, they will continue to request them.

Loss mitigation is not an easy process to navigate so if you’re struggling, consider getting some help!

If you’re in Washington State and feeling nervous about starting the process, having issues getting a decision back from your lender or have been denied from a loss mitigation option that you want – feel free to reach out for a free mortgage relief consultation at (425) 654-1674.