Home Loan Advice

If you are far behind on your mortgage with no hope of catching up it is tempting to simply walk away from it. This is sometimes called ‘jingle mail’ since you mail the keys to the lender and vacate the house. It is understandable that people want to walk away from the stress of the situation, from trying to pay for a house they can’t afford. They believe that simply giving up and letting foreclosure happen is the best thing to do. Unfortunately, giving up and walking away can actually increase stress.

Current economic conditions have many people finding it difficult to hang on to their home since both their household income and home value have declined. Others, who bought at the peak of the real estate boom, have ended up owing a lot more than their houses is actually worth. Therefore, it’s no surprise that people just want out of bad circumstances. But, just walking away is a terrible choice and one that could cause regret and stress for many years to come. Let’s look into why this is the case.

You may assume that if you just walk away from your home and let foreclosure happen that you will be free and clear. Unfortunately, this isn’t the case.

In most states, the bank can sue you and get a deficiency judgment. This is the difference between what you owed on the house and what the mortgage lender made from the house when they sold it. Naturally, it is quite rare for a foreclosure sale to pay off the total amount owed on a mortgage loan. This may leave a former homeowner with a deficiency of $10,000 or more. In areas where home prices were very inflated it’s not unusual to see deficiencies of more than $100,000. Some states also allow for punitive damages as well under some circumstances.

Once a deficiency judgment is entered the lender can seek to garnish wages and seize or place liens on personal property and bank accounts. Some states, such as Florida, give lenders a lot of power. Others, such as California, are nonrecourse states where laws restrict the ability of mortgage lenders to obtain judgments against borrowers. Exactly what they can do will vary from state to state and from mortgage loan contract to contract so it’s best to consult an attorney if you need to know the exact implications in your case.

Also, foreclosure will destroy your credit score for up to 10 years. Typically a foreclosure being filed will drop a borrower’s credit score by 100 points and it will drop another 100 points when the foreclosure sale takes place. This can make it difficult for you to get credit for important things such as renting a place to stay or purchasing a car. It can even affect your ability to get a job.

If you’re in a position where you know you cannot afford to stay in your current home you need to be proactive. Many banks are willing to work with a cooperative borrower when it is clear that there’s no hope of them continuing to pay the mortgage. Just bear in mind that lenders will have to be convinced that you’ve tried every reasonable possibility to keep your home first. There are also government programs and HUD approved housing counselors that can help you seek foreclosure alternatives such as a short sale or deed in lieu of foreclosure. While these alternatives will cause a drop in your credit score they’re no where near as devastating as a foreclosure. Plus, most lenders will choose to not pursue a deficiency judgment if an agreement is worked out beforehand.

If saving your home is proving impossible, get expert mortgage loan and foreclosure alternative advice from a local attorney, credit counselor or HUD approved housing counselor. They can help you navigate the laws that apply to your loan and help you discover the best foreclosure alternative for your particular situation.