There are many different types of loss mitigation. These include a partial claim option, cash for keys negotiations, special forbearance, deed in lieu of foreclosure, short sale or refinance, and loan modification. While all of these options are different in character, they are very similar in purpose. The purpose of these types of negotiations is to mitigate the potential financial loss of the banking or lending institution due to a bad or defaulted loan. These negotiations are carried out by a third party and any decisions handed down through the process are legally binding.

A partial claim option is a process created by the United States Department of Housing and Urban Development that allows for individuals who have fallen behind on their mortgage payments. This process was created in order to decrease the amount of foreclosures that were the result of hard times, economic woes, or lost jobs. Under the auspices of the United States government, the mortgagee advances the funds past due, up to and including twelve months of back payments. This advancement is a considered an additional loan. However, the lender is not allowed to charge interest or demand repayment of the loan until the initial mortgage is paid off or the property in question is no longer in the initial mortgager no longer owns the property.

A deed in lieu of foreclosure is a financial option in which the mortgager cedes collateral property in order to maintain ownership of the given property by releasing all obligations to a former debt. A lending institution agrees to this process because the ceded collateral property is generally worth more than the indebted property. Cash for keys is similar to the deed in lieu of foreclosure. The difference is that instead of the mortgager giving over other assets in order to retain ownership over the initial property or asset, the lending institution pays the mortgager to vacate the stated property. They do this in order to avoid the added cost of evicting such clients.

Special forbearance is when the lending institution or bank agrees to reduce the monthly loan payments or to nullify them completely for a given time. They do this in order to give the mortgager more time to catch up on payments that have fallen behind. This is not dissimilar to what credit card companies due when you are behind on your credit card payments. They want you to repay the amount borrowed; therefore they reduce the monthly payment in order to insure the total repayment of the loan.

A short sale enables the homeowner to sell an indebted property because the lender reduces the principle balance of the mortgage. This enables the homeowner to sell the property for market value and thereby repay the defaulted loan. A short refinance is similar to a short sale, but the principal is reduced in order to refinance the loan with a different loaning institution.

Loan modification is the most common form of loss mitigation. This process involves the reduction of the principle balance, the lowering of the interest rate, increasing the loan term, forgiveness of past due payments, or any combination of these terms.

Loss mitigation is defined through many processes. However, the ultimate point of the different processes is the same – to limit the liability of the loaning institution and to decrease the obligation of the mortgagee.