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Falling behind on your mortgage impacts your finances in several ways. Your first hit goes on your credit report where you start showing past-due balances lowering your credit score. If you never bring the payments back to green, the bank may begin foreclosure proceedings. Whether you already went through foreclosure or just owe last month’s bill, your tax refund is safe from garnishment by your mortgage company.
The Internal Revenue Service does offer a refund offset program to recover monies owed. The catch is the offset program is only available to local, state and federal municipalities to recover past-due government debts. The IRS may take your refund for back child support or defaulted student loans, but not for a private debt such as a defaulted mortgage balance.
Homeowners who already finished foreclosure often face one of two outcomes: forgiven debt or a deficiency judgment. When a bank uses a non-judicial foreclosure, it cannot pursue a judgment for the remaining balance after the house is sold at auction. Instead, the balance is written off as forgiven debt. The IRS considers forgiven debt to be taxable income and treats it as such. Your bank cannot touch your refund, but if it forgives the debt, your refund may be less than expected. Increasing your taxable income increases your tax burden.
Deficiency judgments come at the conclusion of a judicial foreclosure. When the lender takes you to court, it may request a judgment for the balance owed after the house is sold at auction. The lender may pursue several remedies including wage garnishment and bank levies. Once your refund money hits your bank account, the IRS has no control over it. If your mortgage company levies your bank account, it could take your refund to cover the judgment balance.
Contact your lender as soon as possible to work out a payment arrangement to make up the past-due balance. Homeowners facing foreclosure may qualify for a loan modification program to save the property. Most mortgage lenders work with distressed homeowners to find solutions to a financial hardship. If you have a deficiency judgment, the mortgage company may set up payment arrangements to pay the balance instead of pursuing forced-payment options such as garnishment or levies.
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