Loss Mitigation And Short Sale

If you are facing mortgage foreclosure and have started researching what are your options, you have probably seen the terms loss mitigation and short sale and want to know if either works for you.

Actually, while they are related, these are two different things.

Loss mitigation refers to actions that a mortgage lender takes to reduce (mitigate) its losses. Foreclosures cost home mortgage lenders a good bit of money. Obviously, there are court costs and attorney fees for the foreclosure action itself. But the mortgage lender also has to pay to protect and maintain the house until it sells. Then the mortgage lender has to pay a realtor's commission and closing costs when the home is sold. And the lender may have to sell the home for less than it "paid" for the home. Finally, while the house is for sale by the lender (and it may take a long time to sell), the lender loses interest money it could be earning from the home loan.

It is a financial benefit to the home lender if it can reduce any of the costs. Sometimes, mortgage lenders will work with borrowers so that the lender does not have to foreclose. Other times, a lender will accept a deed in lieu of foreclosure. There are times when a lender will accept a short sale by the borrower.

Basically, a short sale is where the lender accepts less than the amount owed on the mortgage so that the borrower can sell the home. For example, because a borrower has someone who will pay $150,000 for a home, a home lender may accept $150,000 to satisfy its mortgage even though it is owed $175,000.

With a short sale, the home lender may lose money, but the loss may be less than if the lender had gone through foreclosure, got the home, and then held the home for a long time looking for a buyer.

Because a short sale is for less money than a mortgage lender is owed, the mortgage lender does not have to agree to the short sale, and some won't agree.

Some home lenders will put restrictions on the terms of a short sale such as requiring that a borrower sign a promissory note promising to pay the lender the difference between the amount owed on the mortgage and the amount accepted to satisfy the mortgage with a short sale.

If you are considering a short sale, be sure that you understand the terms and it is a good idea to have a lawyer review the documents to be sure that they conform to your understanding of the terms of the short sale.

Stop! Don't blindly chase any option to stop foreclosure. See stop foreclosure options to learn what options you have in your situation. Remember, what works in one person's situation, may or may not work in your situation to stop, avoid, and prevent foreclosure. For more general information, see Stop Foreclosure - Five Options You Need To Know.

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