Life is unpredictable, so there are times when even the most economically stable homeowners can find themselves in tricky financial situations. It could be an unexpected death in the family, a severe medical condition, or an old debt that has resurfaced.
Loss mitigation is a strategy used between a lender and borrower to resolve a difficult financial situation. During the mitigation, the lender helps a struggling borrower by altering the original loan agreement to help the homeowner make their monthly payments.
These strategies can often be used to avoid the foreclosure process. Many lenders prefer not to go through foreclosure as it requires time, money, and effort — the process often ends with them profiting much less than they initially expected or losing money on the deal.
Loss mitigation should be mutually beneficial for both parties. Even if the lender receives less money for the property than initially expected, it’s often a better option than forcing homeowners out and attempting to sell the property.
That said, let’s look at seven loss mitigation options that can serve as good alternatives to foreclosure.
A deferral or partial claim is a strategy where all or some of the missed payments for your loan are added to the backend of the mortgage term.
For example, if you can’t make your mortgage payments now but believe you’ll be able to make them in a few years, your lender may allow you to make those payments later.
This method could be a good strategy if your financial difficulties are temporary or due to an unexpected issue, like an injury/illness. However, your lender may require proof that you can make the owed payments at the agreed-upon time. Plus, you’ll be extending the length of your mortgage and most likely accruing additional interest in the process.
Alternatively, you can contact your lender and ask about a repayment plan. When you enter a repayment plan, your lender adds back payments to your monthly payments for several months until you catch up with what you owe.
For example, if your regular mortgage payment is $1200 per month, and you’ve missed three months of mortgage payments, your lender may allow you to enter into a repayment plan where you make $1600 payments for nine months. In the long term, your lender gets all the money they’re owed, but you don’t have to pay it back at once and can slowly chip away at it over time.
As you can imagine, this can be a great strategy if you don’t have the funds to repay what you owe immediately. However, it would mean that your mortgage payments would increase for a set period. If you’re struggling to make the current payments, adding a few hundred dollars to your future payments could make it even harder to stay afloat.
Sometimes, homeowners may be granted a forbearance period by their lender. A forbearance is a temporary pause or hold on your mortgage payments, giving you time to stabilize your finances or save money before the payments begin again.
Of course, any deferred payments will have to be made eventually. Depending on the lender of your mortgage and the terms of your agreement, you may have to pay back all of the deferred payments in a lump sum. It may be possible that you could enter into a repayment plan like the one described in the section above.
Reinstatement is another loss mitigation option that involves repaying all of your past-due mortgage payments simultaneously, usually after a forbearance period. If you can afford this option, it’s a great way to make your loan current and move forward with your mortgage on regular terms.
While straightforward, reinstatement can be demanding for many people. You would need to pay off the entire balance of what you owe and continue with the regular payment schedule. Because of this, It’s mainly an option if you’ve only missed a few payments due to circumstances that have since been resolved.
For example, reinstatement may be a helpful option if you didn’t receive a paycheck from your employer and missed a mortgage payment, but have since received the check and can afford to make the payment.
A loan modification occurs when you and the mortgage lender redraw the terms of your original loan. For instance, you may need to adjust the mortgage for lower monthly payments due to unexpected financial difficulties. Adding a few more years onto your mortgage term could help you to achieve that goal as long as the lender is willing to allow it.
Loan modifications can often be complex as lenders don’t usually like changing existing mortgages. However, if you have a strong relationship with the lender and an excellent credit score, they’ll be much more likely to agree to the new terms.
If none of the other options are a good fit, you can offer your lender a deed in lieu of foreclosure.
If accepted, the lender will be granted sole ownership of the property, and you’ll be required to vacate the premises so the lender can attempt to sell it. In exchange, you won’t have a foreclosure attached to your credit report, which can make it next to impossible to buy another home for the next seven years.
Co-ownership with Balance is another potential way to both save a home and retain ownership of the property. If approved for Balance's homeownership program, your mortgage loan will be replaced with an equity investment. Your mortgage will be paid off, and you'll make a monthly payment to Balance that covers your occupancy of the home and your share of the insurance and taxes.
In the meantime, you get to stay in your home and save money, pay off debts, and rebuild your credit. Co-owning with Balance is a unique and effective arrangement that’s worked for many homeowners.
In the end, co-ownership with Balance might be the best way to mitigate losses, avoid foreclosure, and stay in your home.
With Balance, you’ll have the chance to get back on your feet, achieve financial stability once more, and avoid the costly penalties of experiencing foreclosure. Contact us today to learn more.
Sources:
What is mortgage forbearance? | Consumer Financial Protection Bureau
What's the Difference Between Reinstatement and Payoff in Foreclosure? | Nolo
What is a mortgage loan modification? | Consumer Financial Protection Bureau
