Mortgage forgiveness is a term that is used to cover situations where the borrower no longer qualifies for a mortgage. This may be because they have fallen behind on their mortgage payments, or because they have gotten a job that no longer qualifies them for the house in question. Another cause is that the property has been sold for less than what was originally owed, which usually happens with foreclosures and short sales.
The mortgages are either paid off in full or the amount owed is reduced to zero. This happens in a variety of ways. The most common is for the bank to take over the borrowers’ remaining debt as a forbearance or loan modification, but this option is not always open to borrowers. In some cases, such as short sales, the bank simply forgives it all. Forgiveness can also occur by having the loan declared illegal under bankruptcy law.