If the new amount is less than what you agreed to pay, you're "under water. Check your area listings. The legality and risk of walking away from your mortgage varies by state and should be the first thing you consider. A minority of states, like California and North Carolina, are "no-recourse" states, meaning lenders can't attempt to claw-back the amount a person still owes on the mortgage from other assets, like a car or bank account.
Defaults are lower in states that have recourse, like Florida and New York, because, as the New York Times notes , lenders threaten the borrowers with judgments against their assets.
But actual lawsuits are rare because they're costly for lenders, according to USA Today , so there's still a chance to walk away without paying more or losing your car, for example. Buying a home or car is probably out of the question for a few years, but it's possible to have a good credit rating above within two years after a foreclosure, according to a recent paper by Brent White, a University of Arizona real estate expert.
You might even be able to qualify for a federally-insured FHA loan to purchase another home in as little as three years. Lenders, of course, don't want this. Fannie Mae, the mortgage giant, issues this warning : "Walking away from your property is not a good choice.
Continue to live in your house as long as you are trying to get help from your mortgage company or through a housing counselor. If you abandon your property, you may not qualify for assistance and your credit will suffer.
Besides the law, you may also want to consider the moral repercussions of backing out on your debts. White at University of Arizona runs them down other things to consider here :. Finally, remember the potential social cost of strategic default. Even if it makes sound economic sense, some still view walking away as a dereliction of duty or somehow irresponsible to the neighborhood in terms of hurting other property values.
If you've weighed all the risks -- legal, moral, and otherwise -- and want to walk away, all you need to do is this: absolutely nothing. As a courtesy, some people send banks their keys called "jingle mail" in the industry but technically, defaulting on a mortgage means just that -- not paying it.
Lenders, of course, will assume you're just late on your payment so expect letters in the mail and plenty of phone calls from collectors, much like being late on credit card bills. And even if you tell them you're walking away, they'll try and change your mind with refinancing or low monthly payments, options you should have already considered. Lenders usually take things seriously after three months of non payment, again assuming you're just late. This occurs when a borrower gets so far behind on payments that the mortgage lender seeks to force the homeowner to vacate.
However, foreclosure will severely damage your credit and keep you from buying another home for years. Still, the legal process can take months, and it may be years before someone who has been foreclosed on actually has to move out.
During that time, you may be able to come to an agreement with your lender, stop foreclosure and stay in the home. A short sale can be useful if the home is worth less than the loan balance. With this technique, the homeowner gets the lender to agree to let the home be sold for less than the loan balance. Then the lender accepts the proceeds in payment of the loan. And in some states the lender can sue you for the shortfall. Sometimes a homeowner can rent the home for enough to cover the mortgage payment.
This can be viable in a strong rental market or when you took the loan out so long ago that rental rates have had time to rise beyond the mortgage payment. A rental also can be accomplished fairly quickly, may not require expensive repairs to your home, needs no lender approval and, importantly, lets you remain a homeowner.
On the downside, renting requires finding another place to live. It can be a good choice if you have enough income to pay rent on a cheaper place or can move in with relatives. The process of foreclosing is costly and long, and many times lenders would prefer to cut borrowers a break if it will keep them in the home and making payments. They can do this by modifying the loan, reducing the interest rate, extending the term or even forgiving principal.
If a loan modification reduces the monthly payment enough that you can cover it, both parties can get what they want. Finally, you can simply walk away. Rather than simply disappearing, however, tell the lender what you are planning. The lender may suggest one of the alternatives above as a better option. Depending on the solution your lender offers, the outcome can be seriously negative—not being able to buy another home for years after foreclosure—to not bad at all—a loan modification that lets you stay where you are with a smaller payment.
Mark Henricks has written on mortgages, real estate and investing for many leading publications. Foreclosures remain on a credit report for seven years, with the impact gradually lessening over time. You can rebuild your credit by working to establish a history of on-time bill payments, but doing so can take years.
A voluntary foreclosure can impact your ability to qualify for a new mortgage for years to come. There are exceptions in special circumstances, however. During that waiting period, you should take steps to improve your chances of getting approved for a new mortgage , including making on-time payments with all your other bills, securing a job with a steady paycheck and saving as much money as possible to help afford a large down payment.
Tax liability is another potential danger of strategic default on a mortgage. How We Make Money. Jeanne Lee. Written by. Jeanne Lee writes about mortgages, personal finance and enjoys finding ways for people to hack their finances. Edited By Suzanne De Vita. Edited by. Suzanne De Vita. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.
Reviewed By John Stearns. Reviewed by. John Stearns. Share this page. Bankrate Logo Why you can trust Bankrate.
Bankrate Logo Editorial Integrity. Key Principles We value your trust. Bankrate Logo Insurance Disclosure. What is an underwater mortgage? Read more From Jeanne. About our review board. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide.
One option a homeowner has when they cannot or no longer want to pay their mortgage payment is to simply walk away from it, known in the industry as "walking away from a mortgage. And doing so might be their best option if their mortgage is underwater. Here's how to tell. If you decide walking away from your mortgage is what you want to do, you'd just stop making the monthly payment on your mortgage note. Note that if you can afford to make the monthly mortgage payment but choose not to because you believe the investment no longer makes sense for you to keep, you'd be practicing " strategic default.
Either way, if you stop making your mortgage payments, you'll soon be in default , and your lender will foreclose. Being underwater on a mortgage usually triggers a real estate investor to consider walking away from that mortgage. It doesn't usually make financial sense to continue paying a mortgage when what's owed is more than the property's worth, a situation that often happens when you pay too much for the property to begin with.
That can easily happen with a cash deal , such as when buying a rental property or a flip , since no appraisal is needed. At the top of a housing bubble, even when buyers take out a mortgage and need an appraisal, homes can appraise for top dollar.
But as we saw during the housing crisis, house prices can come crashing down without much warning. Before you assume you're underwater on your mortgage, make sure you really are. Here are some steps you can take. If you don't want to walk away from your mortgage but want to get out of the deal, you have other options: short sale and deed in lieu of foreclosure , or a voluntary foreclosure.
A short sale happens when you sell the property to a third-party buyer for less than what you owe. Your mortgage lender would need to agree to this transaction. You would also want to know whether your lender would forgive the deficiency or come after you for it. The outcome of a deed in lieu of foreclosure or a voluntary foreclosure is the same as a regular foreclosure: The bank takes back the property.
The differences are the lender releases you from what you still owe on the mortgage, and a voluntary foreclosure might not look as bad on your credit report.
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