Key Takeaway

Homeowners struggling with underwater mortgages can find some relief in the form of mortgage debt relief and forgiveness programs. If you are struggling with financial challenges, these programs can help.

The COVID-19 pandemic resulted in a spike in serious delinquencies in mortgages. Underwater mortgages may not be at the level of what they were during the Great Recession, but they do exist.

Over 7% of home mortgages were delinquent at some stage in June 2020. The pandemic increased the financial challenges faced by borrowers, resulting in an increasing number of past due and foreclosure mortgages.

Luckily, there are many mortgage debt relief options available, including the cancellation of debt and tax relief. If you are struggling to make payments on your mortgage, there are other ways to resolve the situation before you consider foreclosure.

What is Mortgage Debt Relief

Mortgage debt relief is a set of strategies that can help you reduce your debt, restructure your loan, or reduce your monthly payments so you can salvage the situation and work things out.

As borrowers, not being able to pay the mortgage is a nightmare. Whether you are struggling because you are out of work or dealing with other challenges, falling behind on payments is stressful. Mortgages, along with student loans and credit cards, are the leading sources of debt.

If you have already tried to cut down your expenses and have adjusted your budget, it may be time to consider mortgage debt relief. There are several programs that can help you manage your debt and find relief. From forbearance agreements to refinancing your mortgage and mortgage forgiveness programs, there are many options available.

When to Look for Mortgage Debt Relief

Mortgage debt relief may be a good option for you if:

  • You are incurring late fees and penalties on your mortgage.
  • Overdue payments are impacting your credit score.
  • You are unable to make mortgage payments after 30 days.
  • You do not have an alternative option available to make payments.
  • Your home is close to foreclosure.

One late payment can quickly turn into a default on your loan. Before the situation becomes unmanageable and leads to a foreclosed home, it is important to explore all your options to resolve your debt.

How Your Credit Score is Affected by Mortgage Debt Relief

Your credit may be affected depending on which option you choose to manage your debt. For example, a loan modification program or refinancing may not significantly impact your credit report. Foreclosure, on the other hand, can have a considerable negative impact.

Your mortgage lender may offer you a grace period, typically 15 days, to make your monthly payments. Failure to make your payments even after 30 days will make your account go into default. After 120 days, the foreclosure process will start. This will negatively impact your credit score.

If your account goes into foreclosure, it can have an even bigger impact on your credit score. Before things escalate to that level, exploring all possible avenues to pay off your mortgage debt is crucial.

Beware of Mortgage Debt Relief Scams

Mortgage relief scams are not always easy to spot. Many debt relief companies can make false promises to help you overcome your mortgage debt and may even ask for a payment. This is a crime, and there are many red flags that you should be on the lookout for:

  • Asking for upfront fees.
  • Promising to stop an eviction or foreclosure.
  • Asking you to pay them instead of your mortgage lender.
  • Asking you for financial, personal, or identifiable information.

It is best to work with reputed non-profit and for-profit companies with a track record of success to avoid these scams.

Mortgage Relief Programs to Get You Out of Debt

If you are facing financial hardship or job loss, there are many ways to manage your debt. Depending on your situation, your mortgage lender may be able to offer payment options or a reduced interest rate. Here are some of the best programs that you can consider.

Mortgage Forgiveness

In certain situations, your mortgage lender may be able to forgive all or some of the debt you owe. Typically, mortgage forgiveness is the last option a lender will consider, and only if they are convinced you are insolvent.

If your home has significant equity, you can also consider refinancing to avoid paying a large tax bill. The Consolidated Appropriations Act was passed in 2020 to provide tax exclusion of a maximum of $750,000 on the forgiven debt until 2025. Eligible taxpayers can exclude canceled debt from their taxable income.

The Mortgage Forgiveness Debt Relief Act of 2007 also allows you to exclude forgiven mortgage debt from your income tax return with a maximum limit of $2 million. Whether you sought relief through mortgage modification, short sale, or foreclosure, you may be eligible for this debt relief program. Primary residences are eligible for these programs, not second homes.

Mortgage Refinance

Refinancing your mortgage is another debt relief option you may want to consider. Many borrowers that opt for an adjustable-rate mortgage because of the alluring low-interest rates and monthly payments later struggle when the loan converts to the adjustable rate after the initial fixed rate term.

Check your contract to see if there is a cap on how much your mortgage payments can rise during a set period. This sudden increase in monthly payments can cause uncertainty and add to your financial woes. Contact your mortgage lender to see if you can refinance to a fixed-rate mortgage. Ensure that the new payment terms are feasible for your budget.

When refinancing your mortgage, shopping around and negotiating with your lender is important. In some cases, your contract may include prepayment penalties if you refinance your mortgage during the first few years.

Forbearance

For some people, temporary help will be all they need. You may have fallen behind on your payments because you lost a job or due to another temporary setback.

You can work out an agreement with your lender with a forbearance arrangement. This will allow you to stop your payments for a short amount of time. After the end of that period, you can start making partial payments to cover the months you missed to keep your mortgage account up to date.

This easy and effective solution will help you get back on your feet, but it is only suitable for the short term.

Loan Modification

Another mortgage debt relief option to discuss with your lender is loan modification. Your lender may modify your loan terms to help make payments affordable. Many mortgages are backed by government enterprises like the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

Loans by qualified lenders are purchased and guaranteed by these organizations. A lender can make changes to your loan terms through loan modification to help you avoid foreclosure. The Flex Modification Program can lower the monthly mortgage payments by 20% if you are eligible.

This program will first capitalize outstanding or delinquent payments, reduce your interest rate, and then extend the repayment period for your principal balance from the date of modification.

Alternatives to Mortgage Debt Relief Programs

Other than the mortgage debt resolution programs discussed above, several other alternatives are available to help you manage debt.

Short Sale

With a short sale on your real estate, your lender will agree to accept the price at which your home sells as the full payment on your mortgage. Even if your house ends up selling for less than what you currently owe, your mortgage debt will be erased. Talk to a tax professional before you consider this option to determine your tax liability in case of capital gains or deficits.

Deed-in-lieu Of Foreclosure

If your account is already on the way to foreclosure, one way to avoid it is by handing over the keys to your lender and walking away. A deed-in-lieu of foreclosure allows your lender to avoid the time-consuming and expensive process of foreclosure if you are willing to leave voluntarily and hand over the deed to your home to the lender.

This will allow you to clean your slate and wipe off your debt. Even if there is a deficit between your original purchase price and the price at which the lender sells your home, you will be eligible for discharge of indebtedness. For tax purposes, double-check with a professional to see if you may get a tax break in case of a deficit.

Nonjudicial Foreclosure

A nonjudicial foreclosure is different from a foreclosure ordered by a court. With this option, your home will be sold at an auction at fair market value. The money raised will be used to pay off the mortgage. Any deficits are forgiven.

For this option to work, your lender will first have to approve this option. If your property is in a relatively good condition and if you are cooperative, there are higher chances that your lender may opt for a nonjudicial foreclosure.

Downsizing

Another effective way to pay off your mortgage debt is by downsizing. This is particularly effective if you are struggling with debt because of a large mortgage that comes with a larger house.

Sell the larger house and move into a smaller, less expensive place to reduce the amount of debt. Use the difference to pay off your lender. Sometimes the solution can be as simple as this.

Regardless of the reason, if you are struggling to keep up with your mortgage payments, help is available. Reach out to your lender or talk to a debt specialist. A professional can provide you with objective advice and help you find the best mortgage debt relief options.

TurboDebt can provide you with debt relief through strategic planning, advising, and consulting services. Our knowledgeable counselors can help you find the right tax debt relief options and help you resolve the financial challenges you are currently facing. Connect with us for a free consultation today.

Learn why thousands of satisfied clients recommend our debt relief services.