Seek Help Paying Off Mortgage Debt

There is a good news / bad news side of owing a lot of money if you’re a borrower in trouble with mortgage debt.

The good news is that your home loan lender might be willing to renegotiate your loan to give you a break on your payments.

Foreclosure is expensive and it is also bad publicity throwing people out of their homes. Lenders simply do not like to do it, and they don’t want to own your house. They just want to collect the mortgage payments.

Now for the bad news.

The IRS is watching.

A mortgage lender is required by law to report to the IRS any amount of debt forgiven to customers.

That means that unless you file bankruptcy or are otherwise declared insolvent in court, you will probably owe tax on the amount forgiven.

There is no question that thousands of Americans are in trouble with home loan debt, particularly those who may have low or no-down payment loans that have actually raised payment amounts as rates have risen.

Some of these loans were structured in a way that as rates have gone higher that the loans were sent into “negative amortization” - where any equity is erased and the borrower finds they actually owe more on the home loan than the amount they originally agreed to.

Add a potential tax debt to that situation, and we may see an entire class of borrowers risking the loss of everything they own.

Fortunately, Congress is trying to deal with the problem. Right now, a bill in the U.S. House of Representatives entitled “The Mortgage Cancellation Tax Relief Act of 2007″ (HR 1876) would amend the tax code to exempt debt forgiveness on principal home mortgages from being treated as income.

The legislation would help another class of borrowers who negotiate “short sales” or deeds in lieu of foreclosure, or whose foreclosure proceeds are insufficient to pay off their home mortgage debt.

If you think you’re running into this kind of trouble, it is important to speak with a certified financial planner or a certified public accountant not only to estimate your tax risk, but also to find out if there might be other approaches to your individual situation.

It is not wise to count on any guaranteed break from Congress, particularly since the bill is in the early stages. Some things you might want to discuss with your tax expert or financial planner:

1. Is mortgage refinancing an option?

If you have not made a late payment and your credit is in relatively good shape, you may still have the option of a mortgage refinance instead of going for home loan forgiveness. Make sure you have checked your credit reports for accuracy before you make this application.

2. Selling the house quickly.

If you have some equity in your home and your credit is still in relatively good shape, it makes the most sense to get out from under house payments before you risk default or your payments go higher. You may be able to pull out some of your equity to put in savings to reinvest in another home or condo someday.

3. Set a budget, rent cheap and rebuild your savings.

There is no shame in getting rid of a massive mortgage and starting over. Granted, renting does not have the same tax advantages as owning, but with proper planning, you can pick up the pieces and start again.

SOURCE: Montgomery Advertiser