Loss Mitigation Options

Loss Mitigation is one of several processes designed to minimize the damage caused by defaulting mortgage loans. Often backed by an attorney or firm, it involves negotiations between the lender and the borrower that binds them to new, more manageable terms. These terms are aimed at preventing foreclosure and lessen the damage incurred by both parties.

Although mortgage loss mitigation has been around for decades, the real estate slowdown has created a larger demand in recent years. Loss mitigation companies now offer a variety of solutions for troubled homeowners. This article discusses two of the most common methods: home loan modification and short sales.

Loan modification

A loan modification is ideal for borrowers who have fallen behind due to a temporary hardship. Common reasons include job loss, illness, death in the family, and military service. The process involves a modification of loan terms that will allow the borrower to get back on track and stop foreclosure.

Qualifications vary from lender to lender, but borrowers generally need to be employed to qualify for a mortgage loan modification. Most lenders also require a hardship letter explaining the circumstances of default, and . Other common requirements bank statements, proof of income, and other financial documents that show if a bank loan modification is the right solution.

In most cases, borrowers will need a loan modification attorney to negotiate the deal. There are many attorney-backed loan modification companies who have established connections with most major lenders. With a good attorney, loan modification applications get processed faster and gain leverage for better loan modification deals.

Short Sale

A short sale is a common alternative for people who don’t qualify for a bank loan modification. Typically, a loan modification company will offer a short sale foreclosure in case the modification doesn’t work out.

A bank short sale allows the borrower to sell the home, usually to a third-party investor, and pay the proceeds to the lender. The lender may accept it as full payment for the loan, even if the selling price falls short of the mortgage balance or the home’s fair market value. In some cases, however, the lender can still file a deficiency suit against the borrower to recover the remaining balance.

Lenders usually allow a preforeclosure short sale if the discount is less than the expected costs of foreclosure. To get a better picture of the situation, most of them also require a hardship letter and standard financial documents.

The obvious drawback to a mortgage short sale is that it doesn’t keep borrowers in their homes. Short sale foreclosures are usually meant to minimize credit damage when the only other alternative is foreclosure. While it still adversely affects the borrower’s credit, it’s a less damaging form of foreclosure loss mitigation. Short sales easier to clean up on the record and the borrower can usually take out another loan after one to three years.

Bankruptcy and loss mitigation

Declaring bankruptcy can open up new options and increase one’s chances of getting back on track. Because of the large demand for loan loss mitigation, many banks are starting to tighten their policies. Some are offering mortgage loan modifications only to those already in foreclosure, or more commonly, to those who have filed or are about to file for bankruptcy.

This does not mean that bankruptcy is a surefire way to stop foreclosure, nor will it qualify homeowners for mortgage loan modifications. In fact, studies show that 96% of people who file for bankruptcy still end up with a foreclosure, which just doubles the damage.

For borrowers with relatively small debt (typically less than $75,000), a good alternative is to make a consumer proposal. This is an offer to pay the lender a percentage of the debt over a specific period. The process generally takes one to two months, which makes it ideal for borrowers who are already in foreclosure and cannot afford to wait for loan modification help.

The circumstances vary for each borrower, and what may work for one may not be so effective for another. To see if bankruptcy is a viable option, it’s best to consult companies or law firms offering loan modification services. Find a good attorney who can listen to your situation and discuss the effects of bankruptcy on your mortgage.

Loan Modification Case Studies