Details

Created on Tuesday, 21 February 2012 14:11

The Mortgage Forgiveness Debt Relief Act

As things currently stand, many homeowners are enjoying mortgage loan modification terms. This practice has been widely seen as the best way to help stop the continuous decline of the mortgage sector.

Under the home loan modification agreement between lenders and borrowers, the lenders agree to changes in the loan agreement so that the mortgage loan can be more affordable for the borrower.

Most often, lenders who agree to modify the loans of distress homeowners offer the borrower the opportunity to make lower monthly payments. Some of the lenders can either decide to cut the amount of interest or the principal amount of the loan all in an attempt to help the borrower complete the loan repayment plan.

While there is a considerable amount of in-house programs that help distress homeowners to obtain modified loan terms, the vast majority of this program is supported with funds from the federal government.

It is a well known fact that mortgage interest is tax deductible for which reason; homeowners obtain a reduced tax rate because of the fact that they have mortgages and make monthly payments to that effect. As soon as the mortgage is over, the homeowner is expected to be rolled back onto a regular payment plan. This means that distress homeowners who receive mortgage loan modification and as a result obtain lower mortgage payments have to make up for the difference by paying higher taxes.

The tax office sees any amount of money that remains in the pocket of the borrower instead of going to the mortgage lender (due to loan modification) as extra income that needs to be taxed.

This beats the whole aim of the mortgage modification scheme; which is to ensure that delinquent homeowners are assisted financially with their mortgages so that they would have enough money left to settle other personal expenses.

Moreover, when the mortgage sector started its downward tumbling move, a lot of homeowners in the country fell delinquent on their home loans resulting in large scale foreclosure proceedings. The mortgage sector needed to be rescued in other to stop the economy from collapsing.

Since the possibility of homeowners defaulting in mortgage payments even after their monthly payments have been reduced considerably was so eminent, borrowers needed more financial assistance.

Such badly needed assistance came in the form of the Mortgage Forgiveness Debt Relief Act. Under this act, distress homeowners who are fortunate to obtain mortgage loan modification either through a government backed program or a private program administered by the mortgage lenders do not need to pay tax on the forgiven amount.

However, this will only hold if the homeowner does not benefit from a home loan modification that strikes as much as $2 million from the borrower’s debt.

The other point to take note of is that, the act passed in 2007 only covers property that is used as the primary residential home of the borrower.

This means that when a borrower has more than one home; should he or she modify the terms of the one that is not the primary residential unit, he or she would still be expected to pay taxes on that property even though that property is under a home loan modification scheme.

On the other hand, if the modified mortgage is on the home the borrower spends more time in, then the Mortgage Forgiveness Debt Relief Act would play a crucial role in cancelling the tax obligations on that property.