🏡 What Is Loss Mitigation in Real Estate?

Loss mitigation is the process a mortgage loan servicer uses to help homeowners who are struggling to make payments. Its goal is to prevent foreclosure by offering options such as repayment plans, forbearance, loan modifications, or other alternatives approved by federal servicing guidelines.

How Loss Mitigation Works

When a homeowner falls behind on payments, the mortgage loan servicer must evaluate whether the borrower qualifies for programs that help them avoid foreclosure. This process is known as loss mitigation.

Common steps in loss mitigation:

  • Servicer reviews the borrower’s financial situation
  • Borrower submits income documents, hardship letters, and bank statements
  • Servicer determines eligibility based on CFPB/RESPA rules
  • Approved programs are offered to prevent foreclosure

Loss mitigation is required under federal law before a servicer may proceed to foreclosure.

Types of Loss Mitigation Options

Homeowners may qualify for one or more of the following:

  • Repayment Plan: Spread missed payments over several months
  • Forbearance: Temporary pause or reduction of monthly payments
  • Loan Modification: Change to loan terms to permanently reduce payments
  • Partial Claim: A second, interest-free mortgage to bring the loan current (FHA)
  • Reinstatement: Lump-sum payment to bring the loan current
  • Short Sale: Sell the home for less than the balance owed with servicer approval
  • Deed in Lieu: Homeowner voluntarily transfers the property to avoid foreclosure

Why Loss Mitigation Matters

Loss mitigation protects both the homeowner and the lender. Foreclosure is costly and time-consuming, so servicers are required to explore alternatives first.

  • Helps homeowners keep their homes when possible
  • Reduces damage to the borrower’s credit
  • Slows or stops foreclosure timelines
  • Ensures the servicer follows federal servicing rules

Most importantly, loss mitigation gives homeowners time, options, and a path to prevent the loss of their home.

Why Loss Mitigation Matters for FSBO Sellers

  • Sellers must resolve delinquency or modification status before closing
  • Servicers may require updated payoff statements during mitigation
  • Short sales must be approved by the servicer
  • Loss-mitigation delays can impact FSBO closing timelines

Understanding loss mitigation helps FSBO sellers navigate payoff demands, closing requirements, and timelines affected by hardship programs.