When is it okay to walk away from your mortgage?Posted by Jolenta Averill, Broker on Tuesday, August 3rd, 2010 at 8:25am.
When to walk away from mortgage
It is strongly advisable not to walk away from a mortgage, unless you are faced with an extreme situation, such as one of the following:
o Due to a sudden drop in income you are unable to make your mortgage payments
o You are underwater and have little or no equity in your home
o You are not eligible for a loan modification and you are in a non-recourse loan state (see below)
Options for walking away
There are several options for stopping making payments on your home loan:
• Chapter 7 bankruptcy: If you don’t want to keep your property and want to opt for Chapter 7 bankruptcy, you should not sign the debt reaffirmation deed. If you do not sign the deed, you will not be held personally liable for the loan. The lender can only foreclose your property and take the amount he gets from it. He can’t come after you for any extra amount of money.
• Non-recourse loan: If you have taken a non-recourse loan, you can only foreclose your home. Your lender will be able to collect the collateral only and cannot come after you even if you owe money. However, if you have taken a recourse loan, being a defaulter allows your lender to take legal action against you, such as by garnishing your wages or by other means.
• Deed-in-lieu: You can also take advantage of a deed-in-lieu and transfer all the rights of your property to the lender. He will immediately release you from all indebtedness associated with your mortgage.
Effects of walking away on your credit
Walking away from your home loan will create a big hit on your credit. As a result, you may face further problems in getting a job, buying insurance or getting a loan in the future. If your kid is in college or approaching college, you will not be eligible to get a federal PLUS loan for the next 5 years to pay for the education costs. However, you will be able to borrow from the federal Stafford loan program, but then, you will be at the hands of the private lenders, who will take opportunity of your “walking away” and charge you very high interest.
If you are legitimately in trouble making your mortgage payments, you should try to work something out with your lender or opt for a short sale, instead of simply walking away and damaging your financial life.
Marion Fedrick's experience in the mortgage industry is demonstrated by her work as a mentor with the MortgageFit Community. Marion is an active participant in community forums, as well as a frequent guest blogger and contributor on mortgage-related topics.
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Jolenta Averill, Principal
Lake & City Homes Realty