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 are the consequences of walking away from your home loan?

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.