Your Mortgage Can Be Forgiven...

We get asked about a lot of different types of debt. We also hear and read bad misconceptions every day. The other day, I heard “I have a mortgage. I wish I could get that forgiven.” Guess what? You can! Wait, what?

That led us down the path of what’s the difference between a mortgage and a student loan, how are they different, what happens if you don’t pay them, what does your future look like with these two types of debts. Let’s begin.

A?mortgage?is a loan you take out to buy real estate. You go to a mortgage broker, banker, or other mortgage professional and tell them that you want a mortgage. Have you ever walked out that same day with a mortgage? Probably not.?

So, what happens? The mortgage professional asks you for the following:

1.?????Proof of income, including how long you’ve made that income.

2.?????Credit report to show all of your other debts.

3.?????Bank statements from 1992 to present (ok, a little exaggerated…but recent bank statements for all accounts).

4.?????Investment and retirement account statements.

5.?????Credit score information.

6.?????A blood sample (ok, kidding again, but sometimes it feels like that’s the last thing they ask for on a mortgage).

Then, the mortgage banker looks at all this evidence. They are looking to see if you can afford the payment on the loan at the interest rate they are offering. They are looking to see if you’ve paid your debts in the past and are a good risk to lend money to by using your credit score. They are looking at all the other debts you have to see if you are already maxed out based on your income. After looking, they are going to go verify all that information again before they will actually provide you with the funds to close on your mortgage.

Now, let’s look at federal?student loans?used for educational expenses. These are loans that are offered to students to attend colleges and universities in the United States, for simplicity’s sake. Do you know what the federal government asks you for to qualify for a student loan?

1.?????Are you 18?

2.?????Are you attending an accredited program of some sort?

Great, sign here.

That’s it.

No evidence that you can repay.??No discussion of salary for your degree compared to the amount of debt you are taking on. They may mention that you can pay back the loan based on your income if you can’t afford the whole payment. They probably won’t mention that by doing so, that makes your balance go up to the tune of hundreds of thousands of dollars over time.

How are these two types of debts treated if you cannot repay them?

For the mortgage, if you find yourself unable to pay your mortgage, there are all kinds of options. You can apply for a loan modification. You can sell the house. You can file for Chapter 13 bankruptcy and reorganize the arrears if you have regular income. You can even get foreclosed on. In California, if your first mortgage forecloses on you through a nonjudicial foreclosure (which most of them are), even if they don’t get paid back the full amount they are owed, they CANNOT come after you for the difference. Your balance is forgiven. There was a lot of that back in 2007-2010. Lots of forgiveness happening.

For the student loans, if you find yourself unable to pay your student loans, then you have a few options. You can apply for income-based repayment. You can stretch out your loans for an extended payment plan. However, those loans don’t go away. For many people, the loan balances are increasing rapidly because of the interest being charged on interest. Balances have doubled and tripled for some people because their early years of employment are their lowest income years (which is natural in a career). By the time they were able to start increasing payments, the interest accrued to the point where even the increased payments did not pay towards the principal. If you are in default on student loans, then your tax refunds can be intercepted. Or, if you are on social security, your monthly social security check can be garnished at 15%. All for debt you were told to take on at 18 to get a job because “student loans are good debt…”?and the colleges and universities did not want their gravy train to end.

Mortgages are hard to get. Easy to get rid of, though. Student loans are very easy to get. Very difficult to get rid of without a lot of stress over many years. Maybe we should cover the definition of predatory lending in our next article…