When you can’t make your mortgage payments, foreclosure may feel imminent. Although the situation may feel helpless, there still may be a chance to save your home. When you realize that you are going to fall behind on payments, it is imperative that you reach out to your lender immediately because they may be willing to work with you through loss mitigation strategies. It is in a lender's best interest to work with you because they can take a loss on the mortgage if they have to foreclose.
Not sure what loss mitigation is or how it works? Today, let’s break down loss mitigation strategies in detail and explore why you should pursue them instead of accepting foreclosure.
In a nutshell, loss mitigation includes any strategies that a homeowner/lender may pursue to avoid foreclosure. As you likely already know, foreclosure is a legal process in which a mortgage lender takes possession of property used as collateral for the loan.
Foreclosure is bad for homeowners because:
Meanwhile, foreclosure is bad for lenders because:
Therefore, it is in both parties’ best interest that the homeowner remains housed. Foreclosure is never the ideal solution. Loss mitigation strategies may allow homeowners to remain in their homes even if they cannot make their mortgage payments as they are currently set up.
Loss mitigation strategies will vary from mortgage to mortgage. Some of the most common loss mitigation strategies are as follows.
A homeowner may propose short selling the property to their lender if they’re unable to make mortgage payments. A short sale involves selling the house for less than the remaining balance on the mortgage. However, the short sale is still usually enough to recoup most of the lender’s remaining investment for the mortgage loan.
The advantages of a short sale include:
Depending on the short sale amount, some homeowners will still be on the hook for any remaining balance. Other lenders may allow homeowners to exit the mortgage contract with a few thousand dollars still remaining on the balance. It all depends on the specific situation.
Homeowners should contact their lenders about a short sale if they are interested in this loss mitigation strategy. Only lenders can authorize a short sale for a property they have an interest in.
Forbearance is a special mortgage payment forgiveness timeframe in which mortgage payments are deferred to a later date. The homeowner doesn’t have to pay anything on their mortgage from anywhere between one month all the way up to 18 months, depending on the agreement.
However, once the forbearance time frame is up, the borrower must pay back the remaining mortgage balance, either as a lump sum or by making higher-than-normal mortgage payments for several months following. Because of this, forbearance is usually only a suitable strategy if the homeowner is experiencing temporary, provable financial hardship.
Like a short sale, a lender must approve forbearance. The homeowner has to request a forbearance period from the lender and receive approval for a set timeframe. If a homeowner has their loan backed by a federal institution, like the HUD, all lenders must give homeowners the opportunity for forbearance if they are unable to make their mortgage payments due to COVID-19-related struggles.
Balance Homes offers a unique co-investment strategy that may help homeowners avoid foreclosure. In short, Balance Homes pays the balance of a homeowner’s current mortgage and becomes a co-investor in the property. The homeowner remains housed and makes regular, affordable occupancy payments to Balance Homes instead of their current lender.
Over time, the homeowner can purchase equity in the home and become the majority owner, or they may restructure their agreement into a traditional mortgage. Co-investing with Balance Homes gives homeowners more freedom and flexibility compared to many other loss mitigation strategies. You can contact us today for more information.
If a homeowner is broadly satisfied with their mortgage arrangement but just can’t make quite the agreed amount for mortgage payments, they may contact their lender about a loan modification. Under a loan modification, the lender agrees to lower the monthly mortgage payment.
In exchange, they will make up the difference by extending the term length of the mortgage, increasing the interest rate, or other strategies. This still allows the lender to eventually recoup their investment, and the homeowner continues to make mortgage payments as normal. But it may allow them to make lower than normal payments if they receive a sudden and permanent pay cut.
A deed in lieu of foreclosure allows a homeowner to simply transfer ownership to the lender immediately and without a sale. In exchange, the mortgage lender may release the loan and relinquish any remaining balance, effectively letting the homeowner off the hook.
Lenders may pursue this option if they believe they can sell the property quickly and make a profit. Or they may do it if the mortgage doesn’t have a lot of cash left on the balance, and they wish to avoid the extra costs and time requirements involved with the traditional foreclosure process.
No matter which loss mitigation strategy you choose, you must submit an application for it to your lender. Homeowners cannot avoid foreclosure by pursuing one of these strategies by themselves.
Therefore, all homeowners should take a hard look at their finances when they first believe they may have difficulty paying off their mortgages. If you are in this situation, contact your lender right away. Remember, most mortgage lenders don’t want to force foreclosure. They will work with you however they can to avoid this outcome.
It is important to start pursuing options with your lender immediately to try and stop foreclosure.
All in all, loss mitigation strategies may help Americans retain their homes even in the face of financial problems or foreclosure. Pursuing a loss mitigation strategy is always smarter than allowing the foreclosure to proceed, even if you're strapped for cash.
This is doubly true with innovative loss mitigation strategies like co-investment with Balance Homes. Contact us today for more information and to see if it’s right for your situation.