Stop Foreclosure Blog

Walking away from your home is probably the best choice for homeowners who are upside down on their mortgage by tens of thousands or if you can no longer afford your mortgage payments only if you have exhausted all other options such as a short sale or loan modification. However, there is a right way and there is a wrong way to abandon your home. As this article will explain, simply not making payments and then leaving your home will put you into serious legal and financial trouble far worse than whatever you’re experiencing now. Instead, use the strategies outlined below to “safely” walkaway.

Here is why you should not just walkaway:

• On March 31, Fannie Mae set new guidelines to lenders prohibiting borrowers who have foreclosed from getting another mortgage through them for five years unless they provide documentation that demonstrates the hardship which led to foreclosure (e.g., medical bills, divorce decree, pink slip, etc.). If they do provide the necessary documentation, the mortgage prohibition is only reduced to three years. Even after five years, borrowers with foreclosures will be required to make at least a 10% down payment and have a minimum FICO credit score of 680.
• Freddie Mac, another loan guarantor, considers foreclosures in their files as a major credit blot for seven years. Senior officials at the company are now aggressively pursuing some walkaway borrowers under deficiency judgments where permitted under state law. Which means that if the proceeds from the foreclosure auction on your home does not cover the entire loan amount, you can be held legally responsible for paying it back– which may include garnishment of your wages.
• A number of websites have showed up claiming to cut the hassles of bailing out of a mortgage. One such company promises it will allow clients to live in their home for up to eight months with no mortgage payments. Of course they charge you $895 for a customized plan. Another company claims that it will repair your credit to purchase a house in as a little as two years after you buy their $995 “how-to” kit.
• Fair Isaac Corp. of Minneapolis, developer of the FICO scores used in most mortgage transactions, wants consumers to know that there is no possibility that a foreclosure can be minimized or wiped away in a short period of time. Foreclosures are comparable to bankruptcy, and will affect your ability to get insurance, employment, auto loans, credit cards, students loans, and even an apartment. Not only that, but you will be subjected to higher interest rates on future loans and may be liable for federal income tax liabilities. The IRS will consider any debt owed on a foreclosure as taxable income.

So how do you hand in your keys without severe repercussions?

A much better alternative is to negotiate a deed-in-lieu of foreclosure with your lender. Under this arrangement, you hand over the deed to the property and agree not to trash the house. In exchange, the bank forgives your debt. You must convince the bank that you are under difficult circumstances by completing an extensive “hardship package” that will require documentation such as your tax returns, W-2s, monthly income and expenses, proof of hardship, and most importantly a hardship letter that explains in detail how you arrived in your current situation. Some lenders will want you to have had the home up for sale for a period of time before you simply just give it back to them. They are not in the business of real estate, and would rather to not take back the home. They simply want their monthly payments or the loan paid in full.

Should you be faced with a genuine hardship, then lenders will be sympathetic a few years down the road. However, if you just walk away don’t expect to get a new home loan for the next five to seven years. And if you do manage to get one, it will not be on favorable terms.