Loss mitigation was introduced as an effort between the federal government and the mortgage industry to help homeowners facing foreclosure keep their homes. A loss mitigation counselor will look to setup a loan modification plan or a repayment plan that is realistic for the homeowner to pay back. It may include a partial payment of amounts in arrears followed by an extension of the loan terms to compensate for the remainder of the amount of the loan in default.

Loss Mitigation Options

Reinstatement or Repayment Plan: A reinstatement or repayment plan might be used for borrowers who have fallen behind on their mortgage payments but are able to subsequently resume making their monthly payments. Under this arrangement, the lender increases the regular monthly payment until the delinquency is repaid.

Forbearance Agreement: A repayment plan based on the borrower's financial situation that may include a temporary reduction or suspension of payments for a specific length of time. Often used when the borrower has a reduction in income or increase in expenses that is not expected to be permanent.

Mortgage Modification: A refinancing of the debt and/or extension in the term of the mortgage loan that allows the borrower to catch up by reducing the monthly payments to a more affordable level. Used for borrowers who have recovered from a financial problem and can afford the new payment amount. Modifications could include lowering interest rates, adding payments to the end of the loan term, paying off small amounts of arrearages each month, adding a lump sum payment due at pay-off, or simply lowering payments for a set period of time.

Loan Assumption: An arrangement where a qualified borrower agrees to assume responsibility for repayment of the mortgage.

Pre-foreclosure or Short Sale: This is where a lender can agree to accept the proceeds of a preforeclosure sale in satisfaction of the loan even though the proceeds may be less than the amount owned on the mortgage.

Deed-in-Lieu of Foreclosure: The borrower voluntarily deeds the property to the lender in order to avoid a lengthy foreclosure, additional accrued interest, and expenses. Typically used when attempts fail to sell the house prior to foreclosure.