Walking Away From a Home and Mortgage
Is it ever a good idea to just walk away from your home? What if you bought it at the height of the market and now it's worth less than what you paid for it? You might even owe more to the mortgage company that what the home is worth so you've begun considering a strategic foreclosure.
A lot of people have told you that you should turn your back on the house as a bad experience and just go. Maybe they're telling you that foreclosure isn't that big a deal and you can start over.
Still, you and your spouse have good jobs and you're not behind with your mortgage payments. You wouldn't mind renting for a while, but is it really that easy to get rid of such a burden?
The Emotions of "Strategic" Foreclosure
Strategic foreclosure is what happens when you're underwater on your home and you decide to intentionally allow the bank or lender to foreclose on it. But how many times did your mother ask you, "If everybody is jumping off a cliff, should you do it, too?" The answer is most likely no.
It's not easy going through a foreclosure. It's heartbreaking, nerve-wracking, and time-consuming. Consider this: the moment you drive a brand new car off the lot, it's no longer worth what you paid for it but that doesn't mean it's worthless. Should you turn that car around, drive it back to the dealer's lot, and hand over the keys?
Probably not. You most likely made a commitment to repay a car loan. You'll pay it off one day and you'll trade it in for another car, putting the value of that car into your pocket.
A home is not that different. There are plenty of good reasons to own one. You need a place to live and you made a promise to repay a loan. Most people feel an ethical if not legal obligation to follow through on their word when at all possible.
Markets Move in Cycles
Of course, if you've suffered some major financial catastrophe and you simply cannot make the mortgage payments on your home, that's a horse of a different color. Maybe you can't avoid foreclosure. But if you're working and earning and your finances are on an even keel, you might want to take a deep breath and persevere.
Why? Because markets move in cycles. Eventually, what goes down comes back up. Historically, real estate values appreciate over time. "Jingle mail" is not usually a wise choice. You have better alternatives than to "buy and bail." This isn't to say, however, that you simply must stay put and continue to pay on your mortgage.
Internet Sites for Walking Away From Your Home
If you can no longer afford to make an increased mortgage payment due to an adjustable rate mortgage loan or you just really do want to walk away, you might look online for a solution. Unfortunately, there are no honest solutions online from walk-away profiteers.
These are companies that prey on troubled borrowers' misfortunes and perpetuate the myth that walking away and going into foreclosure is a logical, foregone alternative. But you don't need the help of an online company to do what you can do yourself. Don't line the pockets of opportunists.
There are plenty of nonprofit organizations that can help you negotiate with your lender or offer other viable options and they don't charge you. Consider contacting the National Credit Foundation for Credit Counseling, Hope Now, or a HUD Approved Counseling Agency. You can also find local nonprofit agencies that will give you free advice regarding foreclosure. Call your local council member's office for information.
Plenty of foreclosure scams will find you if you fall behind with your payments. These companies will strip the title from you faster than you can say, "What's a quitclaim deed?" Don't do business with them. Call a trusted friend or a real estate lawyer before agreeing to accept "help" from a company who wants to steal your home by making promises it can't fulfill.
If you've reached the point where a Notice of Default has been filed and you're headed into foreclosure, know that there are ways to stop foreclosure. But again, you must deal with a reputable company that doesn't have a dog in the fight. Ask yourself how much help a company is likely to offer if it stands to profit if you fail.
Alternatives to Strategic Foreclosure
Before you move ahead with an intentional foreclosure, consider sparing yourself some angst and aggravation if you're determined to take this route. Find out if your lender will do a deed in lieu of foreclosure. This lets you voluntarily hand over the deed to the property without suffering through all the foreclosure proceedings.
Of course, the lender must approve and consent to the deal and this might not happen if you're not in financial distress. The same applies to a short sale where the lender agrees to let you sell the property for less than your mortgage balance.
The Bottom Line on Foreclosures
Foreclosures will ruin your credit and that derogatory credit ding will stay on your credit report for 10 years. A short sale or deed in lieu will affect credit pretty much the same way. Your score will most likely drop by about 100 points depending on what it was before the foreclosure.
You might qualify to buy another home in two to three years, but the interest rate offered to you will not be attractive. And keep in mind that some states allow your lender to pursue you for any deficiency judgment—it forecloses and ultimately sells the home for less than your mortgage balance and you're still legally on the hook and obligated to pay the difference. So what really have you gained?
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.