Q: We are in the process of refinancing our mortgage. The company we are working with was recommended by our current mortgage company. They have said they will reduce our loan amount by $90,000.
This sounds too good to be true. How can the current lender just drop $90,000 from the principal of our loan? Where does that money go? Are they really going to satisfy our current mortgage in full and refinance our house for $90,000 less than we owe now?
A: If you are in dire financial straits, several months delinquent in your mortgage payments, and working with a mortgage lender who is working with the federal government to rewrite loans to 31 percent of your income, I suppose it’s possible that this might be legitimate.
The Obama administration is pushing first and second mortgage lenders hard to work with borrowers who are having difficulty making their mortgage payments. In fact, they have set up significant financial incentives for both borrowers and lenders to get loans rewritten so that they are much more affordable. Optimally, you’d spend no more than 31 percent of your gross monthly income on your mortgage payment.
Unless you’ve called (888) 995-HOPE and a housing counselor has put together a three-way call with your lender to start working on a solution for your loan, this sounds a bit suspect.
Before you sign any documents, make sure you understand what they are. They may reduce the principal on the new loan by $90,000, but you may be given a document to sign obligating yourself to repay the $90,000 to the old lender. You need to be careful, and you’re right to be skeptical.
In most cases, existing lenders that agree to loan modifications and reduce the amount that is owed to them agree to forego any action against the borrower for the amount forgiven.
In your case, your current lender may just want out of the loan. If your current lender has the loan in its portfolio and wants out, it may be willing to take less than the whole amount owed just to get out. What you are describing would be similar to a short sale, but in your situation your lender will take less than the full amount owed by letting you refinance with another lender. If that is what is going on, your current lender will take a loss on your loan. That loss is the $90,000 that it won’t get when you refinance the loan.
I have not heard of lenders working with other lenders in this way so you need to make sure that your existing lender agrees to accept less than the whole amount owed to them when you refinance and that the lender agrees that it will not come after you for the deficiency in the payoff.
While in past years on residential property that forgiveness of the debt would have been taxable to you as a benefit on your federal income taxes, current changes might make the forgiveness on that portion of the loan not taxable at this time.
I’d do more investigating before signing any documents.
April 30, 2009
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