How to Protect Yourself in Walking Away From a Mortgage

Walking away from a mortgage results in a voluntary foreclosure also known as a "strategic default." Some people who can afford their mortgage walk away because they no longer like the neighborhood or the home has suddenly lost value. It is possible for a home to lose half its value during a major housing slump. Some people---including those who purchased at inflated prices with low down payments---choose to walk away rather than wait for a rebound in home prices. However, people who walk away could face serious financial or credit problems for years.

Instructions

1

Meet with a bank loan officer or a nonprofit credit counselor to learn how walking away from a mortgage impacts credit. Get advice from a bank loan officer you know, if possible. A loan officer not affiliated with your mortgage company can give you unbiased advice on what to expect, and a credit counselor can as well. See a loan officer at your bank or credit union, and get referrals for credit counselors from charitable organizations such as the United Way or a local chapter of the National Urban League. Foreclosure remains on credit reports for seven years, making it difficult or impossible to purchase another home for several years.

2

Hire a reputable real estate attorney to negotiate terms allowing you to walk away from the mortgage while protecting yourself. You can do this yourself, but the stakes are so high that hiring an experienced attorney is best. For example, the attorney can negotiate a transaction called a "deed-in-lieu of foreclosure," which allows you to give the property to the mortgage company and walk away from the property without a foreclosure on your credit report or further responsibility for the mortgage.

3

Negotiate with the mortgage company on your own if you decide not to hire an attorney. Contact the mortgage company to request permission for a short sale, if applicable. Short sales allow the homeowner to sell the house for less than the balance on the mortgage. This is important for people who owe more on the mortgage than their house is worth, a situation known as being "upside down" on the mortgage. People usually become upside down on their mortgages after the house dramatically declines in value.

4

Ask the mortgage company not to seek a "deficiency judgment" from you if a short sale or deed-in-lieu is not possible and you still plan to walk away. The mortgage company will sell the house after you walk away, and may hold you responsible for the difference if the sales price is less than the balance on the mortgage. Some states allow mortgage companies to file lawsuits to force the former owner to pay the difference. Protect yourself by discussing this with the mortgage company before you walk away. Get any agreements in writing.