When is it okay to walk away from your mortgage?

Posted by Jolenta Averill on Tuesday, August 3rd, 2010 at 10:25am.

Have you recently been laid off from your job and are facing difficulty making your monthly mortgage payments? Are you thinking of walking away from your mortgage? If you answered yes to either one of these questions, then you should know what adverse effects walking away from your mortgage could bring to your financial life.

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.

Hi, and welcome to our Madison real estate blog. Whether you're a consumer, journalist or Realtor, we encourage you to share your thoughts by leaving a comment. Here you'll find relevant local and national real estate information, as well as market statistics, insight, and information about a variety of neighborhoods and real estate listings. If you'd like more information about anything in particular, please use the contact form and I'll be happy to help.

Jolenta Averill, Principal
Lake & City Homes Realty
(563) BUY-SOLD

7 Responses to "When is it okay to walk away from your mortgage?"

Chris R wrote: There are many occasions when walking away from a home isn't a choice. Many people are simply forced out of their home due to outside influences. Then of course there are those who simply just want to cut and run.

I for one am going to stick it out... unless of course I get laid off or something.

Posted on Wednesday, August 18th, 2010 at 5:27pm.

Madison Renters Insurance wrote: Walking away from your mortgage can be a good thing in this market. Although it is unfortunate, we've seen a lot of these homeowners move into apartments and save for a larger down payment the next time they want to purchase a home.

Posted on Monday, August 23rd, 2010 at 12:41am.

Owner Finance Austin wrote: I wouldn't ever say its "ok" to walk away from a mortgage, but sometimes it's the best option if you're in a bind for one reason or another.

Posted on Thursday, August 26th, 2010 at 5:07pm.

Palmdale homes wrote: I think a lot of people who are behind in payments are afraid to talk to the lender because they feel like they've done something wrong and will be in trouble. That is simply not true. The biggest step is to overcome that initial fear and look at the bright side that maybe something can be worked out to save them from foreclosure.

Posted on Tuesday, October 5th, 2010 at 9:31pm.

Knowing Your Options When Facing Foreclosure wrote: [...]Madison short sales
When is it okay to walk away from your mortgage?


Posted on Friday, July 22nd, 2011 at 11:46am.

The Year in Review: Our Top 10 Blog Posts of 2010 wrote: [...][...]

Posted on Friday, April 27th, 2012 at 8:44pm.

Foreclosure Options wrote: With so many people still facing foreclosure and being in upside down mortgages the question of whether to just walk away from the mortgage is a serious one. Hopefully the real estate market will improve soon and make that choice unnecessary for many.

Posted on Sunday, November 18th, 2012 at 3:36am.

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