Loss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner's lender. Loss mitigation works to negotiate mortgage terms for the homeowner that will prevent foreclosure. These new terms are typically obtained through loan modification, short sale negotiation, short refinance negotiation, deed in lieu of foreclosure, cash-for-keys negotiation, or a partial claim loan or other loan work out. All of the options serve the same purpose, to stabilize the risk of loss the lender (investor) is in danger of realizing.

The most common benefit to the homeowner is the prevention of foreclosure because loss mitigation works to either relieve the homeowner of the mortgage obligation or create a mortgage resolution that is financially sustainable for the homeowner. Lenders benefit by mitigating the losses they would incur through foreclosing on the homeowner. Immediate foreclosure creates a tremendous financial burden on the lender. Loss mitigation allows the lender to take a lesser loss right now in order to avoid the much greater losses caused by such foreclosures.