Walking away from a mortgage has many negative consequences. There are times, however, when it is unavoidable. When a mortgage is upside down or underwater, it might be the only option available to you. You have an upside down mortgage when your mortgage loan is more than the value of your house. Your liability for walking away from your mortgage will depend on the structure of the loan. In most cases, walking away will also severely damage your credit.
Upside Down Mortgage
An upside down mortgage is also known as negative equity. If you did not make a down payment when you purchased your home or if you made a very low down payment, you may have negative equity in your home. This results from depreciating home values. Additionally, if you have a mortgage loan that allows you to pay less than the total interest due, you effectively add to the balance of your mortgage loan monthly. This can also result in negative equity.
The biggest potential liability for walking away from your mortgage is debt. In most cases, you still have a legal obligation to pay the debt after walking away from the mortgage. In other words, the lender can still sue you for any money owed on the defaulted mortgage. If your lender does write off the amount you still owed on your mortgage, you may assume tax liability. Written-off debt is generally taxable under Internal Revenue Service rules. If you walk away from your property, the lender will certainly foreclose, which will damage your credit. This can make it considerably more difficult and expensive to obtain credit in the future.
Short sales and deed in lieu of foreclosure are two options that can potentially have a less adverse impact on your credit rating than a foreclosure. A short sale and a deed in lieu of foreclosure also have the potential benefit of qualifying you for tax relief. In a short sale, the lender agrees to allow you to sell the house for less than the full balance of the mortgage loan. A deed in lieu of foreclosure requires you to convey your interest in the property to the lender. Lenders will sometimes agree to a short sale or deed in lieu of foreclosure to avoid the time and costs involved with the foreclosure that is the inevitable result of walking away from a mortgage.
A good alternative to walking away from your mortgage is to renegotiate the loan with the lender. In many cases, your lender will work with you to avoid a foreclosure. Lenders generally don't prefer to foreclose, since it is an expensive process. Additionally, many states have laws that will assist homeowners in distress. You should discuss the situation with your attorney and accountant, and carefully consider all options available to you before walking away from your mortgage.
- Hud: Avoiding Forclosure
- "Market Watch"; 11.3 Million Homeowners Underwater on Mortgage; Rex Nutting; February 2010
- "Washington Post"; Principal Forgiveness Program May Offer Relief for Underwater Homeowners; Kenneth Hamey; March 2010
- "Star Tribune"; Underwater Options? Stay or Go; Kara McGuire; August 2010