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Mortgage Modification

There are circumstances in which a Borrower may desire to retain the property and can request that the lender modify the mortgage. These modifications may include reduction in interest rate, reduction in principal, increase in loan term or some combination thereof. Unfortunately, much like the other processes in this section, a mortgage modification is not without its consequences. First, many lenders will not discuss a mortgage modification with a Borrower that is current on his/her mortgage payments. Therefore, a Borrower most often has to stop making his/her mortgage payment to be considered for a mortgage modification, which will impact his/her credit. Second, even if the lender is willing to modify the mortgage, the Borrower must meet certain financial requirements and be able to document to the lender that the Borrower can in fact afford the newly modified terms. For example, a Borrower without sufficient documented income is unlikely to obtain a mortgage modification in that the lender is not going to grant the modification without reasonable assurances that the Borrower will be able to comply with the modified terms. Third, even if the lender does grant the modification, there still may be tax consequences resulting from any debt forgiveness.

You may have significant tax consequences as a result of a mortgage modification because the Lender is going to “write off” any principal reduction and issue you a 1099C. This is seen as debt forgiveness by the IRS and may be treated as income. Please consult with your tax advisor for specific details regarding your situation.


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