Do You Qualify for Mortgage Forgiveness?

The Mortgage Forgiveness Debt Relief Act has allowed thousands of homeowners to reduce the amounts that are owed on their mortgages. Mortgage forgiveness occurs when a lender accepts a lesser amount than the entire balance as payment in full. 

Qualifications for Mortgage Forgiveness

Mortgage forgiveness is available only on the mortgage for the primary home. It must also be due to a loss in value of the home or because of a short sale as an alternative to home foreclosure. Some refinances that are used to restructure the mortgage may also qualify provided the lender has accepted less than the full amount of the original loan. In most circumstances, a second mortgage or home-equity loan does not qualify for mortgage forgiveness, but it may qualify under the bankruptcy or insolvency exclusions.

Tax Benefits for the Homeowner

The dollar amount that is forgiven by the lender used to be taxed as regular income to the homeowner. Starting in 2007 and extending to 2012, the mortgage forgiveness act was changed to allow the exclusion of the forgiven amount from your income taxes. The exclusion is only for homeowners who have forgiven amounts of less than $2 million or $1 million for married couples filing separate tax returns.