Walking away from your mortgage? Think before you leap

Ginger Dean

December 8, 2012

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

I have to admit, the thought of walking away from an underwater home is a liberating one. No, I won't tell you that I feel beholden to an underwater home because I don't. Large corporations walk away from their debts every day and have options around doing so that the lowly homeowner does not have at his/her disposal.

But before you walk away and send the bank jingle mail (sending your house keys to the bank), there are some serious considerations around the potential consequences of a mortgage default. They include wage garnishment and credit that prevents you from buying a home for at least a few years. Check out the rest below:

Do you live in a recourse state?

Before walking away, check to make sure whether or not you live in a recourse state. A recourse state allows the bank to come after you in the event of a default. Non-recourse states like California, homeowners can walk away with little consequence outside of damaged credit.

Non-recourse states

  • Alaska
  • Arizona
  • California
  • Connecticut
  • Idaho
  • Minnesota
  • North Carolina
  • North Dakota
  • Oregon
  • Texas
  • Utah
  • Washington

Recourse states

  • Alabama
  • Arkansas
  • Colorado
  • Delaware
  • District of Columbia
  • Florida
  • Georgia
  • Hawaii
  • Illinois
  • Iowa
  • Indiana
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Montana
  • Mississippi
  • Missouri
  • Ohio
  • Nebraska
  • Nevada
  • New Hampshire
  • New Jersey
  • New Mexico
  • New York
  • Oklahoma
  • Pennsylvania
  • Puerto Rico
  • Rhode Island
  • South Carolina
  • Tennessee
  • Vermont
  • Virginia
  • West Virginia
  • Wisconsin
  • Wyoming

Impact on credit

Everyone thinks about this before walking away. Whether they care about their credit and the possible damage is another case altogether. Some homeowners are frustrated and at their wits' end so they see this as the last resort. But often they fail to realize that the impact is longstanding. If you've had a home foreclosed on you, then you have to wait three years before being able to buy a new home if using an FHA loan. But one way around that is to rent until you become eligible again. Still, it may be a possible roadblock when your potential landlord checks your credit.

Weigh your options

Is walking away the only option you have? Have you considered renting out the home? Is it possible to have the loan modified by the bank or through a government program like HAMP or HARP? There's even the new mortgage settlement program with large banks like Bank of America and JP Morgan Chase that can guarantee you a modification once you send in the paperwork.

Possible financial consequences: wage garnishment

Given the amount of foreclosures it will be some time before the bank catches up with you. Still, when they do, the process will be swift and painful if you lose the battle. Some homeowners owe so much on the property that even if it is sold in foreclosure, the owner is still owes the bank the remaining balance minus the foreclosure sale price.

Consider all options before walking away. While liberating, walking away can put you in a financial bind for several years -- which may not make it worth sticking it to the bank.

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