Financial problems make it tough to afford your house payments, however, it is possible to negotiate mortgage forgiveness with your lender. A mortgage forgiveness plan is a lender-approved reduction to your home loan principal balance that allows you to either keep your home or move out and avoid foreclosure. Regardless of which mortgage forgiveness option you choose, inform yourself about possible tax implications before you agree to a mortgage forgiveness plan. A deficiency judgment, which affects your credit, is another consequence to consider. Although mortgage forgiveness eases your financial woes, the process is often lengthy and complex.
Contact your lender and ask about mortgage forgiveness options. Explain your financial circumstances and be ready to answer questions regarding your finances and circumstances over the phone. A mortgage modification can reduce some of the principal you owe on your mortgage loan. A short sale allows you to sell your home for less than the outstanding balance due. A deed in lieu of foreclosure allows you to transfer your home's ownership to the lender to satisfy the loan.
Gather financial documentation for your lender's review. Whether you apply for a loan modification, short sale or deed-in-lieu, lenders usually need to see two recent bank statements, proof of income, your last two years of tax returns, and a list of your monthly expenses. For a short sale, you must provide the listing agreement, a sales contract, a closing costs statement and your buyer's proof of funds.
Write a financial hardship letter that explains the reason you can't afford to pay off the current principal balance on your loan. Specify the hardship, such as job loss, and list any actions you took to avoid default. For example, if you previously were denied a loan modification and tried unsuccessfully to sell your home via short sale, you should put this information in your hardship letter for a deed-in-lieu.
Request and sign a letter from your lender that states the exact terms of your mortgage forgiveness plan. The letter should specify the amount of principal the lender agrees to cancel, or forgive. In a short sale, your approval letter should state that the lender agrees to waive its right to any deficiency -- the difference between the amount owed and the sale price.
Cancellation, or forgiveness, of unpaid debt is considered income for tax purposes. Lenders report the amount forgiven as canceled debt. You will receive IRS Form 1099-C, "Cancellation of Debt," after you agree to mortgage forgiveness.
All mortgage forgiveness plans are subject to lender approval. Application protocol may differ by lender and loan type.
Your lender may seek a deficiency judgment against you after a short sale, depending on state law and your loan type.
Things You'll Need
Proof of income documents
Proof of assets documents
List of monthly expenses
Real estate contracts
- Bankrate.com: Debt Forgiveness for Homeowners?
- Nolo: How to Avoid a Short Sale Deficiency
- Bank of America: Signing Your House Over to Your Lender
- Bankrate: Walking Away from Mortgage Is Costly
- New York Times: Writing the Hardship Letter
- IRS.gov: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
- GAD Law: Short Sale and Foreclosure FAQ
- IRS.gov: Home Foreclosure and Debt Cancellation
- AllLaw.com: Steps to Completing Deed in Lieu Foreclosure