Asking your attorney, “What is loss mitigation?” could help you save your home if you are facing bankruptcy. Loss mitigation is when a third party helps a homeowner by working to negotiate mortgage terms for the homeowner that will prevent foreclosure. Loss mitigation can certainly help you avoid foreclosure and the ramifications that come with it. However, while there are a variety of loss mitigation options, there is no guarantee that you will keep your home.
What Is Loss Mitigation and How Does It Help?
Despite popular belief, when a lender threatens foreclosure all is not lost as there are still several options available to you to help save your home. The following list of different types of loss mitigation will outline the possible options that may be available to you, though their effectiveness depends on your situation. A foreclosure attorney in Chicago can discuss your options with you and determine the best solution:
- Loan modification: This option changes or softens the terms of the original loan in a way that allows the borrower a better chance to repay. This can be done in one of three ways:
- The interest rate is reduced
- The length of the loan is extended to stretch out the payments
- The lender reduces the principal balance due
Lenders may be open to loan modification, and the federal government offers several types of loan modifications through the Making Home Affordable Program.
- Short refinance: In order to permit the homeowner to refinance with a new lender, the current lender reduces the principal balance of a homeowner’s mortgage. While a short refinance is great for a borrower because it allows them to lower the balance of their mortgage and take advantage of lower interest rates, it can be difficult to actually convince a bank or lender to offer you a short refinance. This is because it is not necessarily in their best interest to offer you a break unless your foreclosure will cost them more money to pursue.
- Short sale: In a short sale, loss mitigation is achieved when the lender accepts a payoff that is less than the principal balance of a homeowner’s mortgage. This would be pursued in order to permit the homeowner to sell the home for the actual market value of the home. However, the homeowner must prepare a letter of hardship explaining why they can’t make the payments now and aren’t likely to be able to resume making them in the future. This principal reduction would enable the homeowner to sell the home.
- Deed in Lieu of Foreclosure: This is a special type of deed that allows a borrower to transfer ownership of their home to the lender. In return, the borrower is relieved of responsibility for repayment of the mortgage loan. When this is permitted, the lender may compensate the homeowner up to $2,000 once the owner has moved out of the home. However, if the owner has a second mortgage or other secondary lien on the property, they must use the compensation to pay it down or, if possible, pay it off. If a borrower can financially make their mortgage payments, this option will probably be rejected by the lender.
- Partial Claim: Under this option, a borrower will advance funds on behalf of a lender in an amount necessary to reinstate a delinquent loan to make up for missed mortgage payments. There are different types of claims: Private lenders may loan partial claim money as a second mortgage, but with FHA-insured loans, the claim payment is an FHA insurance benefit limited to 30% of the amount in default. In either case, the money is applied directly to the mortgage.
It takes more than an article to understand the answer to the question, “What is loss mitigation?” Foreclosure is complicated, and it takes time to work through the process. The best ways to avoid losing your home are to keep the lines of communication open with your lender and to contact an experienced foreclosure attorney right away. Suburban Legal Group PC will help you successfully come up with a plan to manage the foreclosure process. Contact Suburban Legal Group PC for a Free Foreclosure Legal Evaluation today.
DISCLAIMER: All information on this website are provided for informational purposes only and are not intended to be construed as legal advice. Suburban Legal Group PC shall not be liable for any errors or inaccuracies contained herein, or any actions taken in reliance thereon.