Following the latest housing crisis in 2008, state government agencies have been stepping up mortgage relief programs that encourage lenders and servicers to use loss mitigation options that allow borrowers to better afford their mortgages.
When borrowers cannot afford to pay reasonable mortgage payments, loss mitigation options can often help further soften the negative effects of foreclosure.
Here are some types of mortgage loss mitigation options designed to help in a potentially risky or bad situation.
Loan Modification
In this process, a homeowner’s mortgage is modified, with both the lender and homeowner being bound to new terms. These new terms will make it much easier for the borrower to repay the amounts owed.
The modification may involve a reduction in the interest rate, an extension of the length of time for repayment, a different type of loan, or any combination of the three.
It’s important to know that most successful loan modification processes are negotiated with the help of an attorney or a settlement company. Some borrowers are eligible for government assistance in loan modification.
Short Sales
A Short Sales, also known as a pre-foreclosure sale, is when you sell your home for less than the balance remaining on your mortgage. If your mortgage company agrees to a Short Sale, you can sell your home and payoff all (or a portion of) your mortgage balance with the proceeds.
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.
Short Refinance
A short refinance is a transaction in which your bank or mortgage lender agrees to pay off your existing mortgage and replace it with new a loan with a reduced balance, essentially helping you avoid foreclosure.
In that sense, it plays the role of a loss mitigation tool as it benefits both the bank and the homeowner, since the bank would lose less than it would in a foreclosure and the homeowner gets to stick around in their property.
Deed in Lieu
A deed in lieu agreement is an arrangement whereby a mortgagor assigns the deed to his or her home to his or her mortgage lender. Homeowners agree to these agreements to avoid foreclosure. In exchange, the lender releases them from all liability for repayment of the mortgage loan.
Many homeowners seek deed in lieu agreements when their mortgage ends up underwater, meaning they owe more on their home than the home is worth.
Cash-for-keys Negotiation
In this option the 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.
Special Forbearance
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.
Some features of this option are that it restores a loan that is at least 3 months delinquent but no more than 12 months past due PITI, provides more relief than an informal plan, does not modify the original terms of the loan and has no maximum term.
Partial Claim
A partial claim is a federally backed interest-free loan from HUD that homeowners can use to make their mortgage current and avoid foreclosure. The HUD partial claim program pays the homeowner’s past-due mortgage payments to the lender to avoid foreclosure. The funds come from FHA mortgage premiums.
Under this option, the mortgagor can pay up to 30% of the unpaid principal balance of his mortgage. If you sell or refinance the home after a partial claim has been granted, you will have to pay it back.
Contact us
If you would like more information about loss mitigation options and want to avoid foreclosure before it is too late you can contact us toll free at (800) 931-2424 x651 or request information from an attorney or HUD-approved housing counselor.
