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Kacie Goff is a personal finance and insurance writer with over seven years of experience covering personal and commercial coverage options. She writes for Bankrate, The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. She's covered a broad range of policy types — including less-talked-about coverages like wrap insurance and E&O — and she specializes in auto, homeowners and life insurance.
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Kenneth Chavis IV is a senior wealth counselor at Versant Capital Management who provides investment management, complex wealth strategy, financial planning and tax advice to business owners, executives, medical doctors, and more.
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When a borrower fails to make mortgage payments, their mortgage lender or servicer steps in to begin a process known as loss mitigation. There are several possible loss mitigation options, with varying degrees of impact on the borrower’s financial picture.
If you’ve missed several mortgage payments, here’s what to know about loss mitigation and mortgage relief.
Loss mitigation means a mortgage lender or servicer will offer relief or repayment options to a borrower struggling to keep up with their loan payments. Your servicer might refer to this process as “retention.”
While it’s not always possible, loss mitigation aims to avoid the much more damaging foreclosure process.
Loss mitigation is one of many responsibilities your servicer oversees. Ultimately, it’s in the servicer’s best interest to help you repay your mortgage or at least reduce losses for both parties if foreclosure is the only option.
Depending on the nature of your financial hardship (e.g., whether it’s short-term or long-term), your servicer might offer you the following loss mitigation options:
The Federal Housing Administration (FHA) recently introduced a new lifeline for borrowers with FHA-insured single-family forward mortgages who need help keeping up with payments. This new offering, called the Payment Supplement, allows mortgage servicers to temporarily decrease a borrower’s monthly mortgage payment by up to 25 percent without changing the current interest rate on the mortgage. The Payment Supplement is tailored to aid borrowers who may not find sufficient assistance through existing FHA home retention measures due to their mortgage’s interest rate being lower than prevailing rates.
Payment Supplement is open to all borrowers who have not previously used a partial claim entitlement in prior loss mitigation efforts. Mortgage servicers are allowed to initiate the implementation of the Payment Supplement starting May 1, 2024, but this solution must be executed by no later than January 1, 2025.
The FHA also announced that it has extended its full offerings of temporary mortgage loss mitigation options through April 30, 2025. These options were previously planned to expire on October 30, 2024.
Forbearance allows you to temporarily reduce or stop making monthly mortgage payments. The unpaid amount is added to your balance and repaid at an agreed-upon schedule, known as a repayment plan, after the forbearance period expires.
Your servicer might offer you an initial forbearance period of six months, for example, with the option to extend another six months (for a total of one year). When forbearance ends, the borrower typically repays the unpaid amount with their normal monthly payment over six months (or a one-year time frame, if the forbearance was extended). That means higher monthly payments until you’re caught up.
While your mortgage is in forbearance, if you find yourself able to repay the unpaid amount and resume making normal payments, you can contact your servicer to have your loan reinstated.
A deferral represents one way to repay the amount you missed in forbearance. With a deferral, you’ll repay the unpaid amount in full at the end of your mortgage term or if you sell or transfer the home, or refinance to a different mortgage.
Similarly, you might be able to get a partial claim. This interest-free loan from the U.S. Department of Housing and Urban Development (HUD) bundles up your missed payments and gives you a way to pay them back, avoiding foreclosure.
You don’t have to choose forbearance to explore this loss mitigation option. Essentially, your loan servicer structures a repayment plan so you can pay back your missed payments. For example, they might split the money owed over six months, adding it to your normal monthly payment.
Or, with forbearance, your servicer will initiate the payment plan at the end of the forbearance period to recoup what you didn’t pay during that time.
Loan servicers are willing to explore loss mitigation, meaning they want to keep you in the house and get what you owe from them. (This is cheaper and easier for them than foreclosure.) As a result, they may be willing to do a full overhaul of your loan.
A loan modification permanently changes the terms of your loan, such as the interest rate or repayment structure, to make the monthly payments more affordable. Depending on the type of mortgage you have, you might be eligible for a combination of a lower rate, a 20 percent or 25 percent reduction to your payment or an extension to your loan term of up to 40 years.
What is a loss mitigation outroad that will get you through it quickly? Reinstatement — but you’ll need to have some cash on hand.
With this choice, you repay your missed payments in a lump sum. This brings your mortgage current, at which point the lender considers it reinstated.
You can keep your house with many loss mitigation options, but if none of the aforementioned options work for you, then you might consider selling your home. It’s not ideal, but it can help you avoid the serious credit repercussions of foreclosure.
With this loss mitigation option, you use the proceeds from your home sale to fully repay your home loan — including any missed payments.
In a short sale, your servicer agrees to allow you to sell your home for less than what you still owe on your mortgage. In effect, your servicer absorbs the loss while you move on.
Short sale activity tends to rise when homes lose value. While it’s preferable to foreclosure, both sides still take a hit — the servicer on the mortgage, and the borrower in terms of damage to their credit and no ability to profit from the sale.
When you and your servicer agree to a deed in lieu of foreclosure, you transfer the deed to your home to your servicer in exchange for loan forgiveness. The servicer can then sell the home to recoup its loss.
A deed in lieu is similar to a short sale in that you lose your home and lower your credit. Typically, these are last-resort options before foreclosure.
If you know you’ll miss a mortgage payment, contact your servicer right away to start the loss mitigation process. The sooner you contact them, the better they’ll be able to assist you.
You can begin the loss mitigation process by completing the following steps:
Keep in mind: Most servicers offer a 15-day grace period for late mortgage payments. If payment hasn't been made by then, your servicer will likely contact you regarding loss mitigation and subsequent steps.
That depends. With many options — like forbearance leading into a repayment plan or a partial claim — you can stay in your house. But if you’re in dire straits financially and you won’t be able to make up your missed payments, you might not be able to keep the house. In this case, selling it is better than getting foreclosed on.
After you submit an application for loss mitigation with your mortgage servicer, it can take up to 30 days to hear a decision from them in writing. Be sure to apply at least 37 days before the date of your home’s foreclosure sale (if applicable) or your servicer isn’t required to consider your application.
It usually will. Missing payments hurts your credit score, and you’ll usually see that effect continue until you’re caught up on payments. There are some exceptions, though. If your financial hardship is due to a natural disaster or COVID-19, you may get credit protection.
That depends on the path you choose. In a lot of cases, you’ll have higher monthly payments for a while until you catch up on the payments you missed. In others, you’ll need to sell the house. Your loan servicer should be able to explore different choices — and their outcomes — with you.
If your mortgage servicer denies your application for loss mitigation, it must tell you in writing why you were denied. For example, your servicer might reject your application if your loan-to-value ratio is too high or too low, you don’t have an acceptable financial hardship or you have already used all of your loan modification options.
If you submitted your application 90 days before your home’s scheduled foreclosure sale, you can submit an appeal — as long as you do so within 14 days after receiving your denial for loss mitigation. Your appeal will be reviewed by someone other than the person who initially reviewed your case.
Arrow Right Personal Finance Contributor
Kacie Goff is a personal finance and insurance writer with over seven years of experience covering personal and commercial coverage options. She writes for Bankrate, The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. She's covered a broad range of policy types — including less-talked-about coverages like wrap insurance and E&O — and she specializes in auto, homeowners and life insurance.
