Patty owed more on her house than the house was worth. She had purchased the house for $150,000.  Her mortgage was $140,000. Due to the economic downturn, the house now appraised for $100,000.

Patty had always had good credit. She worked hard to make her payments in spite of the depreciation of her home. Her health broke and she had to apply for disability. Her employer fought her application.  She went without a paycheck for several months and went through all her savings. Her medical bills were huge.

She needed to do something to help herself gain control of her finances. She contacted her mortgage company to see if they could work something out with her. They suggested a loan modification.

How it works:

1. The borrower contacts their mortgage company (Lender). The Lender provides the borrower with information about modification. Once the borrower decides to go forward, the Lender appraises the house.
2. The lender offers a reduction in the mortgage based upon the appraisal.  In Patty’s case, her lender was willing to reduce the loan from $140,000 to $100,000.
3. If Patty makes on-time payments for three years, one-third of the $40,000 reduction in Patty’s mortgage is forgiven per year. 
4. If Patty sells, the Lender will receive whatever is left of the reduced mortgage (the $100,000) plus a profit of 25% of the amount the house sells for above $100,000.  Similarly, if Patty refinances, the house is appraised and the Lender receives 25% of the profit based upon a new appraisal.
5. Lender will continue to escrow Patty’s taxes and hazard insurance payments.

Hopefully, Patty can go forward from here and manage her finances. When I reviewed the facts and the Loan Modification Agreement, one of the concerns I had was from an income tax standpoint.  Usually, if a lender forgives a debt, it is taxable income to the debtor. For instance, if a bank forgives credit card debt, the bank will send the debtor a 1099 for the forgiven amount.

Congress passed The Mortgage Forgiveness Debt Relief Act of 2007. Under the Act, mortgage debt forgiven on your principal residence will not be included in your income.

Patty’s credit will certainly be adversely affected. With her modification, Patty should be just fine!

Patty’s situation arose due to issues beyond her control. It could happen to anyone. If you are confronted with a similar problem, it can be overwhelming.

Need to discuss your mortgage or other real estate concerns?  Do you have other estate planning needs Contact one of the attorneys at Mularski, Bonham, Dittmer & Phillips, LLC at (614) 478-8020.