I got a letter from my mortgage servicer about my application for help to prevent foreclosure of my mortgage. Can you help me understand some of the terms?
When you apply for help in avoiding foreclosure you are likely to come across words and technical terms that may be unfamiliar to you. This is another reason why it’s a good idea to get professional help from a HUD-Approved Housing Counseling Agency. Here are a few common terms you may find when you prepare your application:
Loss mitigation refers to the steps mortgage servicers take to work with a mortgage borrower to avoid foreclosure. Loss mitigation refers to a servicer’s responsibility to reduce or “mitigate” the loss to the investor that can come from a foreclosure. Certain loss-mitigation options may help you stay in your home. Other options may help you leave your home without going through foreclosure. Loss mitigation options may include deed-in-lieu of foreclosure, forbearance, repayment plan, short sale, or a loan modification.
Most loss-mitigation applications require you to describe the change in financial circumstances that is preventing you from paying your mortgage. This is referred to as your “hardship.” A hardship may be unemployment, temporary or permanent disability, uninsured medical expenses for a family member, divorce, death, or other circumstances generally beyond your control that significantly reduce your income or increase your expenses. When you submit your application, you should explain your hardship and be able to provide evidence, such as a copy of a divorce decree or checks you wrote to pay hospital bills.
After your lender gives you a mortgage, it may sell your mortgage to another investor. If your mortgage has been sold to an investor and you run into trouble making payments, the investor will determine what type of loss-mitigation assistance is available to you if you file a complete application for assistance. Though the new mortgage rules do not require investors to offer alternatives to foreclosure, most investors do so because avoiding foreclosure can reduce their losses.
Net Present Value calculation
Investors may use a mathematical formula to figure out if they are financially better off foreclosing on your loan or offering you an alternative that avoids a foreclosure. This formula is called a “Net Present Value” or “NPV” calculation. When you apply for loss mitigation, the investor or the mortgage servicer will generally calculate the Net Present Value of the loss-mitigation options that may be available to you and use that information to determine whether to go through with a foreclosure.
Under certain circumstances, your servicer may offer to permanently change or “modify” your loan so that your monthly payment is reduced. Usually, your servicer will first put you in a trial modification for a few months to make sure that you are able make the new payment. If you make the trial payments as agreed, your servicer should finish the paperwork to make the change permanent. Your servicer may not start a new foreclosure (or if you are already in foreclosure, may not complete the foreclosure sale) so long as you pay your trial-period payments on time. However, your loan may still be considered delinquent for some purposes during the trial period, because you are making payments that are less than your regular amount.