Options in walking away
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. Your lender would need to approve a voluntary foreclosure.
The type of loan you have, typically depending on the state where you live, might be the determining factor regarding whether you walk away from your mortgage or not.
Some loans are nonrecourse loans, meaning the borrower is allowed to walk away from the mortgage, and the bank can't come after your other assets. It's kind of like a "get out of jail free" card. Of course, the opposite would be true with a recourse loan: The bank could come after your other assets to pay the debt. State law usually determines whether a loan is a nonrecourse loan.
Nonrecourse states, or those states that allow only nonrecourse loans for mortgage debt, are the following:
- North Carolina
- North Dakota
With the other 38 states, your loan could be recourse or nonrecourse.
The Millionacres bottom line
If you live in a nonrecourse state, the state is practically inviting you to walk away from your mortgage. This might be the best option for you, especially if you have little equity in the property or haven't put much money into it.
Keep in mind, however, that your credit score will be tanked, and you'll have bad credit for the next seven years. If you don't plan on taking out another mortgage loan or renting an apartment, your credit score might not be too much of an issue.
There is that moral issue, however -- the one that might make it hard for some people to sleep at night. If you're the type who would be bothered by not honoring an obligation, walking away from a mortgage might not be the best solution for you. Plus, real estate investing is often about holding onto your investment property. So you might want to try to do that, as homes in the real estate market often increase in value over time.