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Loss Mitigation: What It Means and How It’s Used

Last updated 03/08/2024 by

Benjamin Locke

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Loss mitigation is the process of a lender working with a borrower to avoid foreclosure if the borrower has difficulty paying the mortgage. Lenders or holders of the mortgage note will offer certain structures and allowances to avoid foreclosures, such as a loan modification or a repayment plan. In some cases, the borrower will have to sell the home. In general, lenders do not want to foreclose for various reasons and will do whatever it takes to avoid a full foreclosure.
If you receive a letter from the bank regarding multiple missed mortgage payments, you might start to imagine a scenario in which your lender forecloses on the home. You lose your home, money, and possibly your dignity, and your credit score takes a significant hit. However, if you find yourself in this scenario, remember that the bank does not want to foreclose on your home either. Both parties can work together to avoid foreclosure by going through a process called loss mitigation.

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What is loss mitigation?

Loss mitigation is an attempt to reduce (or mitigate) the severity and consequences of a potential loss. In the world of mortgages, loss mitigation is not just banks, lenders, or mortgage servicers being good Samaritans, helping you out in a time of need. The loss mitigation process is beneficial to you and the bank and is required by federal law. In the majority of cases, the mortgage servicer must appoint a professional to assist with loss mitigation if the borrower is at least 45 days delinquent. Furthermore, most lenders require proof that you have suffered some sort of financial hardship that affects your ability to make your monthly mortgage payments.
Federal law under the Federal Housing Finance Agency (FHFA) stipulates that this appointed consultant must inform the borrower of the loss mitigation process and:
  • how to make an application for loss mitigation
  • how to appeal an application denial
  • how to go through the foreclosure process if loss mitigation fails
There are different ways to utilize loss mitigation: restructuring the loan, deferring payments, and even enacting a short sale as a last result. Here are some of the ways that lenders and borrowers can utilize the loss mitigation process to avoid the worst-case scenario, foreclosure. Foreclosure can result in a big hit to your credit and you being locked out of the conforming loan (loans backed by Fannie/Freddie) market for seven years.

Loss mitigation to keep the home

Here are the ways you can keep your home and work with a lender and loss mitigation consultant to avoid foreclosure.


In layperson’s terms, forbearance is just a pause. When you pause a movie, you still have the rest of the movie left to watch and enjoy. A forbearance is like pressing pause on your monthly mortgage payments. You still owe the exact amount on the mortgage, just like you still have the rest of the movie to watch. You still need to pay the lender back in full, and the terms will depend on the lender and who backs the mortgage. Most forbearances last 3-6 months and can be extended up to 12 months.

Pro Tip

With forbearance, the ideal scenario is that after the initial forbearance period is up, you pay back the missed payments in one lump sum. So if you missed $5,000 of mortgage payments, you pay the lender $5,000 when the forbearance is over. However, this may not be possible, and thus you must work with the lender and your appointed loss mitigation consultant to figure out how to make up the missed payments.
You may also want to refinance your mortgage after the forbearance period. Review your options with these lenders.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Repayment plan

A repayment plan is simply a plan for how you are going to repay your missed payments without altering the original structure of the loan. In the majority of cases, the missed payments will be added to your existing payments.
For instance, if you pay $1,000 a month in mortgage costs but miss several payments, you might pay your original loan of $1,000 plus an additional repayment of $100, resulting in an $1,100 monthly payment.

Deferral or partial claim

A deferral, sometimes referred to as a partial claim mortgage, is the deferment of missed payments until one of three things happens.
  • You sell the home
  • You refinance the home
  • You pay off the loan
Refinancing the home to pay off the loan in a low-interest environment with equity in your home seems like a straightforward solution. However, in a high-interest environment with prices dropping, this can be a terrible idea. This is why a deferment can allow you to kick the can down the road until you sell the home or you come into enough cash to pay back the missed payments.

Loan modification

A loan modification or restructuring means modifying the existing loan or obtaining a whole new loan that takes into account missed payments. Most people will have loans that are backed by Fannie Mae or Freddie Mac, otherwise known as conforming loans. With Fannie/Freddie-backed loans, borrowers can have the option of “flex modification.” With flex modification, the lender can restructure your loan to shrink the monthly payments and even lower the interest rate in certain circumstances.

Loss mitigation when you lose your home

Sometimes, depending on the circumstances, you might not qualify for the above options, or you simply want out of the home and debt. In this case, you have the following options.

Sell the home

Obviously, you don’t want to sell your home in the middle of a downward trajectory in housing prices. But in a stable or ascending market, it’s always an option. In this case, it’s important that you sell your home at the right time. Even in a down market, if you sell your home at the right time, you might be able to take advantage of lower prices with a smaller home.
Again, this also depends on what type of mortgage you originally had and the current interest rate environment. If you had a low-interest 30-year fixed-rate mortgage, then buying another home in a high-interest rate environment might not be ideal. You should consider these external factors should when opting to sell your home rather than using one of the solutions above, which enables you to keep it.

Enact a short sale via the mortgage lender

A short sale is an option of last resort that enables the lender to sell the home for less than the mortgage is worth. The lender must first agree to a short sale and waive any claims of deficiency. In certain states, you are responsible for what is called deficiency, which is the difference between the value of the property and what’s left on the mortgage loan. If you live in one of these states, you will need to have the lender sign a “waiver of deficiency,” allowing you to enact a short sale on the property.
You will also be required to work with a HUD-approved loss mitigation specialist to get the ball rolling on a short sale. A short sale is a method of last resort, which will indeed affect your credit, but not nearly to the extent of a foreclosure. With a short sale, you end up with no home and no debt, but your credit will take a hit for a while.

Deed-in-lieu of foreclosure

A deed-in-lieu of foreclosure is the process of giving the property directly back to the bank without the bank having to foreclose on it. The advantage here is that there is minimal effect on your credit. You will still be locked out of standard/conforming loans for a while, but not as long as you would be if you were to have your home foreclosed on. In most cases, you will have a four-year conforming loan lockout rather than the standard seven-year lockout.

Loss mitigation can be a humanitarian option to keep families under one roof

When times are tough, loss mitigation programs can shoot up and are essential for keeping people in their homes. Kristen D. Conti, an REO (real estate-owned) broker and owner of Peacock Premier Properties, remembers the aftermath of the 2008 financial crisis. “I have specialized in loss mitigation work for many years — 2008 was the apex of the loss mitigation work I did,” she recalls. “This included short sale negotiations, cash for keys, deed-in-lieu turnovers, and more. Once people got wise to ways to avoid foreclosure, they were able to stay in their homes for long periods of time…sometimes years.”

Remember, the bank doesn’t want to foreclose on your home

Foreclosing on a home is almost as bad for a bank or lender as it is for you. The costs are astronomical for a lender to foreclose on your home. In fact, according to Standard and Poor’s, the cost for a lender to foreclose on your home is 26% of the mortgage value. This 26% number is important because it gives you an idea of how much the lender wants to avoid foreclosure based on the market, the amount remaining on the loan, and the current terms of the loan.
For instance, if you just bought a property at the top of the market and have a lot left on your mortgage, the lender will be much less willing to foreclose than if you don’t have much left on your mortgage and the market is buoyant. Remember, as a borrower, you have leverage, too. Lenders/banks do not want to lose money by selling your home as a distressed asset for a fraction of what the loan was even worth.

Loss mitigation doesn’t always work

Unfortunately, although the lender doesn’t really want to foreclose on your home, sometimes loss mitigation will fail. Jon Sanborn, co-founder of SD House Guys, has seen this happen before. “Loss mitigation is not a guarantee against foreclosure, and it can fail in certain circumstances,” he says. “Some of the most common reasons why loss mitigation fails are when borrowers lack the financial capacity or motivation to meet the terms of their modified loan agreement, when lenders do not provide sufficient resources to help homeowners get back on track, or when lenders are too slow to respond, making it difficult for borrowers to meet their obligations. In some cases, the loan may become delinquent before loss mitigation efforts can be completed.”


Is loss mitigation a good idea?

If the other alternative is foreclosure, then loss mitigation might be a good idea. Loss mitigation allows you to keep the home or sell the home with limited damage to your life and credit.

What happens after loss mitigation?

After loss mitigation, there are two paths. Either you still have your home and you were able to defer payments or restructure the loan, or you sell the home. If you opt for a deed-in-lieu of foreclosure, you may not have to wait as long to get another conforming loan.

Does loss mitigation affect your credit?

This all depends on what type of loss mitigation you utilized. If you simply requested a forbearance or a flex modification, then it will have a limited impact on your credit. If you need to completely restructure the loan or need to enact a short sale, it can most definitely affect your credit.

What are the three loss mitigation claim types?

One is where you keep the loan but request a forbearance, deferral, or repayment plan. The second type is where you restructure or modify your loan. The third type is where you are forced to sell the home.

Key takeaways

  • Loss mitigation is the process of a lender working with a borrower to avoid foreclosure if the borrower has difficulty making the mortgage payments.
  • If the borrower needs to keep the home, then they have the option of pausing the mortgage payments through forbearance, restructuring or modifying the loan, or coming up with a repayment plan.
  • Loss mitigation can also result in the loss of the property through a sale, short sale, or a deed-in-lieu of foreclosure, without destroying the borrower’s credit.
  • As lenders spend up to 26% of the mortgage loan balance on foreclosures, they want to avoid them. It’s helpful to understand where your mortgage stands in terms of the amount owed and the market environment.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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