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Loss Mitigation Explained: How to Catch Up if Your Mortgage Falls Behind

Mar 24 2020

Struggling with your mortgage? You may feel a little embarrassed (not to mention stressed) but there’s no need to be ashamed. Financial setbacks can happen to anyone for various reasons, including an illness, the death of a loved one or a crisis like the Coronavirus outbreak.

Let us first say that we’re truly sorry for whatever it is that you’re struggling with. We care deeply and are here to help you through this tough time. On the bright side, just because you’re experiencing hardship doesn’t mean your house will immediately go into foreclosure. You have some time and a number of preventative steps to take.

The truth is, just like you don’t want to lose your house, the powers that be don’t want you to either, which is why the concept of “loss mitigation” exists. Loss mitigation helps servicers minimize their losses by offering ways to help borrowers catch up on their loans. Foreclosures are expensive for servicers, so loss mitigation is a win-win for both parties.

Quick note: Throughout this post we’ll use the term “bring your mortgage current.” What does this mean? Put simply, bringing your mortgage current means paying any past-due amount, including missed payments and fees that were charged (late fees, foreclosure fees).

So, wondering what your mitigation options are? We compiled a list below, but first:

Some Servicer Background

If you’re in hot water, the first thing to do is contact your loan servicer. The contact info is on your monthly statement and they have trained specialists ready to talk to you. While you’re at it, reach out to a HUD-certified housing counselor. They can give confidential advice and even negotiate with your servicer on your behalf free of charge.

A servicer will likely ask you to fill out a mortgage assistance application, which they’ll use to determine what assistance programs you may be eligible for. (To prepare for the call to your servicer or to find a housing counselor, check out our story “Worried About Paying Your Mortgage? Here’s What You Can Do in a Crisis like COVID-19.”)

Why do we say “servicer” instead of “lender”? In today’s market, it’s common for lenders to sell your loan rights to third-party servicers who then manage your loan payments.

Under federal law, lenders can’t start the foreclosure process until you’re more than 120 days late on your payments, and most mortgage servicers offer programs to help homeowners avoid foreclosure. At 90 days, many servicers stop accepting payments, but they’ll typically either help you establish a formal catch-up plan or give you a chance to pay the overdue amount in full.

If you’re less than 60 days behind, you’ll likely speak to your servicer’s collections department. Somewhere between 60 and 90 days, you’ll probably be handed over to the loss mitigation department.

DIY catch-up

Are you less than 60 days behind? You might be able to simply pay extra whenever you can and gradually catch up. After 60 days, your servicer may insist on a formal plan.

Either way, you must communicate with your servicer. It’s important for them to know what’s going on and to have a record of your good-faith efforts.

Servicers will hold partial payments in a separate account, since they can’t apply a payment to your loan until they receive the full payment. Warning: Unless you’re on a formal repayment plan, the servicer will charge late fees until you make your loan current.

Additionally, some servicers won’t accept partial payments and will simply send the payments back to you, so it’s best to save up until you have enough money to make a full payment.

Repayment plan

Under this method, you’ll continue making your regular monthly payment, plus an additional amount to catch up on what you owe. This can be a great option for someone who experienced a job loss, for example, but is now back to work and can afford to pay extra to bring their loan current. Under a formal repayment plan, your servicer will waive late fees and agree not to proceed with foreclosure as long as you are making the agreed-upon payment.

Loan modification

In some cases, a loan modification can help bring your loan current or adjust your payments to an amount you can afford. It is a change to the original terms of your mortgage and may involve extending the number of years you’ll pay the loan or adjusting the principal balance to bring the loan current by including past-due payments and fees. Other types of loan modifications are the lowering of an interest rate and the changing of an adjustable interest rate to a fixed.

A loan modification lets you stay in your home and has less of an effect on your credit score than a foreclosure. However, an extension on the life of your loan means it’ll take you longer to pay it off and will therefore cost you more in interest.

Forbearance

Another option for those who are experiencing financial hardship and are worried about their mortgage payments is forbearance. This reduces or suspends your mortgage payments, typically for a few months, during which time the servicer agrees not to take foreclosure action. During the Coronavirus crisis, Freddie Mac and Fannie Mae announced that they would not charge late fees or negatively report to your credit while you’re in a forbearance plan.

Forbearance is most often given to homeowners with a history of on-time payments who can prove their difficulty is a short-term problem, like a temporary lapse in income due to something like a workplace injury, a reduction in income due to COVID-19 or job loss.

When your regular payments resume, you’re responsible for bringing your mortgage current. Some homeowners pay the overdue amount in a lump sum, while others set up a repayment plan with the servicer. If the past due amount is too much for a repayment plan, then a loan modification could be your best option.

Heads up: When your mortgage payments resume, your interest rate should be the same as it was before the forbearance. If the rate has gone up, this would be an unfair lending practice similar to price gouging. If your interest rate is altered in any way after a forbearance, speak up and ask some questions.

 

For more help with loss mitigation or forbearance, head to the Consumer Financial Protection Bureau and check out our post “In a Jam? Maybe a Housing Counselor Can Help.”

Have more questions or want to talk to a home expert? Download the Keep Home™ app to access the free Home Expert tool.

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