What Are the Different Types of Mortgage Debt Relief?

Mortgage debt relief can include full or partial forgiveness of loans, acceptance of settlements, interest rate reductions, and loan modifications. Borrowers may qualify for assistance regardless of their income if they have difficulty repaying a mortgage, particularly on a primary residence. People with concerns about mortgage repayment can contact their lenders to see which options are available. A debt counseling service may have additional advice and information for borrowers.

One option is loan forgiveness. In this form of mortgage debt relief, the lender agrees to reduce all or part of the outstanding debt on the loan. Total forgiveness is rare, but it may be possible to bargain down the loan balance. The reduced balance can make it easier to make payments, and may allow people to pay off their homes more quickly. Some lenders may also accept cash settlements to clear the loan and discharge the debt.

Another choice is an interest rate reduction. A lender may agree to reduce the interest on a loan as part of a mortgage debt relief program. Other loan modifications may also be available, such as a conversion to a fixed rate loan, or reductions in monthly payments. These modifications are usually available to people with financial hardship who demonstrate a desire to repay the loan and show that they cannot cover their payments as they currently stand.

Consumers who receive mortgage debt relief should be aware of some potential issues. Banks that accept settlements or make modifications may report them to credit agencies, and this could reflect adversely on consumer credit. While it would be worse to default on a loan and walk away, the change to the consumer's credit can make it harder to access funds for several years. Consumers with concerns about this issue may want to meet with a credit counselor to explore ways to repair credit histories, such as paying down credit cards to reduce their overall balance with the assistance of a consolidation loan.

There can also be tax implications. The government may consider debt forgiveness taxable, except in special circumstances. Sometimes regulations may exempt mortgage debt relief from taxation, particularly during periods of economic turmoil where numerous people need assistance with debt. Borrowers who are not sure about their tax liability may want to consider meeting with an accountant to discuss this issue, and to determine if they should adjust the timing of mortgage debt relief to qualify for exemptions or other benefits.