When to Walk Away from Your Mortgage: A Guide for Homeowners

Unfortunately, real estate is not always guaranteed to be a good investment. Sometimes you can find yourself owing more on your home loan than the property is worth. When that happens, you may think about simply walking away from your mortgage. 

If you’re thinking of going this route, keep reading. We’ve compiled all the info that you need to know on the topic, including outlining the benefits and downsides of making this decision as well as providing some alternative options for you to consider.

What does “walking away from a mortgage” mean?

At its core, “walking away from a mortgage” simply means that a homeowner has chosen to stop making their monthly mortgage payments and to allow the home to go into foreclosure. It typically occurs once a homeowner realizes that they are underwater on their mortgage, meaning that they owe more than the home is worth. 

In the real estate industry, this decision is also known as “strategic default” because defaulting on the loan is usually a business decision rather than a circumstantial one. In this case, the homeowner may have the means to continue making their monthly payment, they may have just decided that the home is a bad investment.

What happens if you walk away from a mortgage?

That said, the decision to stop making your mortgage payment is not one to be taken lightly. If you chose to stop keeping up with your mortgage payments, you’ll likely face some tough financial consequences, including:

Deficiency judgment 

Particularly if you walk away from your mortgage while the real estate market is weak, It’s possible that your home could sell for less at auction than you owe on the property. In some states, when this happens, your mortgage lender is allowed to take you to court and sue you for the difference.

This action is known as a “deficiency judgment.” If you’re considering walking away from your home loan, It’s a good idea to check the laws in your state regarding deficiency judgments first. Not all states allow for them and some states even have litigation for prohibiting them. Still, you’ll want to go into this decision with your eyes wide open.

Negative impact on your credit score

Even if you live in one of the more lenient mortgage-walk-away states, it’s important to note that defaulting on your home loan will have a negative impact on your finances, especially your credit score. 

Truthfully, having bad credit can impact your ability to get a mortgage or to be approved for new credit cards in the future. Plus, even if you are able to get approved, borrowers with lower credit scores are often subject to higher interest rates, which means that you’ll pay more for the privilege of financing your expenses.

How to walk away from a mortgage without ruining your credit

Luckily, there are quite a few ways to avoid the negative consequences associated with strategic defaults.  We’ve laid them out for your consideration below.

• Consider refinancing your loan: When you refinance a home loan, you essentially take out a new loan and use it to pay off your old one. Typically, the new loan will have better terms. Lenders usually require you to be current on your mortgage payments in order to refinance, so you’re going to want to keep that in mind before you stop making your payments.
• Ask your lender about loan modification: Loan modification involves changing the terms of your current loan to make it more affordable. You’ll have to have a conversation with your lender in order to do this and it is usually allowed at the lender’s discretion. 
• Sell your home through a short sale: A short sale occurs when the home is sold for less than what is owed on the mortgage. Again, the lender will have to approve this action and it means that you won’t earn any profit off the sales price. But, it’s a viable option to sell your home and avoid foreclosure.
• Use a deed in lieu of foreclosure: With this action, you agree to sign the deed to your home over to the lender in order to satisfy the mortgage note. Here, the lender has the opportunity to sell the home or find a new mortgage buyer and you’ll be free of the responsibility of making mortgage payments. It may also have less of an impact on your credit than a traditional foreclosure.

How does walking away from a house work?

If you’ve looked into all of the above options And have found that they will not work for you, Then choosing to walkaway from your mortgage may be the next step. In this case, all You would need to do is to decide to stop making your mortgage payments. From there, your lender will likely try to reach out to you to resolve the situation before starting the foreclosure process.

Once the foreclosure process has begun, you’ll have to start looking for somewhere else to live. Eventually, your home will be repossessed by the lender and sold. 

Do I need a lawyer before walking away from a mortgage?

Yes, consulting a lawyer before deciding to walk away from your mortgage is highly advisable. A real estate or bankruptcy attorney can provide critical guidance on the legal and financial consequences of such a decision. Lawyers are equipped to explain your rights and obligations under current laws, which can vary significantly by state. For instance, they can inform you about the implications in a recourse state where lenders can pursue a deficiency judgment against you for the balance owed after foreclosure. Understanding these details can help you make a more informed decision.

Additionally, an attorney can explore all potential alternatives to walking away, such as loan modifications, refinancing, or negotiating a deed in lieu of foreclosure. These options might mitigate the impact on your credit and overall financial health. Lawyers are also adept at negotiating with lenders to secure terms that might not be accessible without professional legal assistance. Overall, having a lawyer by your side ensures that your actions are legally sound and that your rights are fully protected throughout the process.

The bottom line on walking away from a mortgage

While walking away from a mortgage was more common during the era of the 2008 financial crisis, these days, it should be seen as a last resort. 

If you are underwater on your mortgage, there are quite a few ways to get out from underneath your debt without purposefully defaulting on your home loan. In many cases, They will have less of a negative impact on your finances and allow you to get back on your feet sooner.  

To that end, do your best to consider them fully before making the decision to just stop making your mortgage payments.

Frequently Asked Questions

Is it possible to remove yourself from a mortgage?

Removing yourself from a mortgage is challenging unless you sell the property or refinance. Lenders typically require the entire mortgage loan to be repaid before releasing a borrower. If you’re unable to pay your mortgage but want to keep ownership, refinancing with a co-borrower might be an option.

Can I get out of my mortgage deal?

You may be able to get out of your mortgage deal by selling the house, paying off the remaining mortgage balance, or negotiating a deed in lieu of foreclosure. Walking away may lead to legal consequences, especially with a recourse loan where the lender can still pursue you for the remaining debt.

How do you terminate a mortgage?

Terminating a mortgage usually requires full repayment of the loan amount through selling the property, refinancing, or paying off the outstanding mortgage. In some cases, homeowners who walk away from their mortgage face foreclosure, and the house is sold at auction to recover the lender’s investment.

Can you undo a mortgage?

You cannot simply undo a mortgage once signed, but you can sell your house for less, refinance, or negotiate a short sale if you owe more on your mortgage than the home’s worth. In non-recourse states, walking away from the home mortgage might also limit your financial liability to the property itself.

Can you undo a mortgage?

Once you sign a mortgage loan agreement, it’s binding. You can’t simply undo it. However, you might be able to sell the house for less through a short sale or deed the house back to the bank. Keep in mind, stopping mortgage payments will damage your credit and could lead to foreclosure.

How long can you skip your mortgage?

Skipping your monthly mortgage payments even once can trigger penalties. After 90 days, foreclosure can severely impact your credit rating. Unless your mortgage contract allows for a formal forbearance or loan program, being unable to make your mortgage payments could cost you the home and leave a mark on your credit history.

What are the mortgage walk away states?

States that require non-recourse mortgages like California and Arizona limit a lender’s ability to collect beyond the home itself. If you want to walk away, a non-recourse loan means the lender can foreclose on the house but can’t pursue leftover mortgage debt. Still, even in states that require non-recourse loans, foreclosure appears on your credit report.