What is a Mortage Cram Down for Rental Properties?

Written by James Hirby and Fact Checked by The Law Dictionary Staff  

Simply stated, a mortgage cram down for rental properties will reduce the amount of your loan based on certain criteria. If you have a rental property that has depreciated in value, you may be eligible for a mortgage cram down. In order to be eligible for a cram down, you must file a Chapter 13 bankruptcy.

A chapter 13 bankruptcy allows you to make a repayment plan of most of your debts in the next three to five years. Repayment plans will not exceed five years. Filing a Chapter 13 bankruptcy also stays collection calls and efforts.

You may be eligible for a mortgage cram down if the market value of your rental or investment property is less than the amount of your mortgage. For example, if your mortgage is for $500,000 but the property is only worth $300,000, you may qualify to have the principal of the loan reduced to $300,000. Please note that first mortgages on your primary residence are not eligible for the mortgage cram down.

In addition to having the principal on your mortgage loan reduced, the bankruptcy court may lower the interest rate. It is up to the bankruptcy court to set the interest rate. When the loan is reduced, the difference between the market value of the rental property and the amount of the loan principal becomes unsecured debt. When you have fulfilled your payment plan, the unsecured debt is discharged or forgiven.

Only people who have enough income to make the monthly payments can qualify for the Chapter 13 mortgage cram down. If your Chapter 13 repayment plan is approved, you are assigned a trustee who will distribute your monthly payments to your creditors. An advantage of sending the money to the trustee is that you will have only one loan payment each month instead of making payments to multiple creditors.

One important item to note is that people will not be eligible for the Chapter 13 bankruptcy mortgage cram down if they have had another bankruptcy case dismissed in the last six months. Another requirement is that debtors complete consumer credit counseling before filing a Chapter 13 bankruptcy.

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