In learning about loss mitigation, there are some basic elements that you need to know. These elements would include the definition of loss mitigation, the process, the types, the benefits, and the definition of some terms related to loss mitigation.
Let's begin with the definition. In simplest terms, loss mitigation refers to how a firm or a professional consultant or loss specialist would carry out a renegotiation of the mortgage terms between a lender and a homeowner. The aim of this renegotiation is to avoid the loss and property foreclosure, or the repossession of the property that secures a loan (in this case a house). This renegotiation usually works with the lender modifying some elements of the loan, such as lowering the interest rates or extending the payment term. Many other kinds of strategies will be discussed below.
The mortgage mitigation process poses benefits to all the parties involved: on the part of the homeowner, he would avoid losing the value of his home, as well as the negative effect a foreclosure would have on his credit rating; on the part of the lender, he wouldn't have to face the risk of a major loss during the foreclosure process (since even the lender may stand to lose thousands of dollars); and on the part of the loss mitigation specialist, that means good business leads for his firm!
Many lenders, especially major financial companies and banks, have their own loss mitigation departments. In cases such as these, the lender itself would act as the loss mitigator, and they usually propose loss mitigation plans to the homeowner once he becomes at risk of foreclosure.
What are the different types of loss mitigation plans that are typically done to avoid foreclosure law?
- One of these plans involves the modification of some components of the loan (such as has been mentioned previously). Other strategies that fall under this type include waiving of late fees and lowering adjustable rates.
- A second plan is called the short refinance scheme, wherein the lender would lower the principal on the mortgage, so the homeowner would be able to refinance with a new lender. Refinancing is not possible without this principal cut.
- A third plan is called a short sale. In this strategy, the lender reduces the homeowner's principal mortgage balance. The homeowner is then allowed to sell his home at its actual market value.
- A fourth plan is called a pre-foreclosure sale, wherein the homeowner is allowed to put up his home for sale and then use the proceeds to pay off his loan, even if these proceeds are less than his debt. Though this would ultimately mean the homeowner would lose his home, at least he wouldn't incur a negative rating on his credit history.
If you're interested in understanding more about loss mitigation, it is best to consult a loss mitigation specialist, especially if you have inquiries regarding your own specific case. A loss mitigation specialist should be able to propose the best repayment plans to suit you (and to which the lender will agree), and should also be able to thoroughly explain to you the implications of such agreements, and brief you on possibilities for loss insurance.
There you have it! These are just some basics to help you understand loss mitigation. Remember, there are many ways and solutions out there; the key is to know what solutions would be best for you. Good luck!