The steep declines in residential real estate prices in many areas of the country have left myriad homeowners with mortgages which are far greater than the current market value of their homes. In this scenario, many homeowners feel like they are fighting a losing battle, and wonder whether they should just walk away and let the bank take back the house. Current rents are quite reasonable, and walking away from your mortgage often entails saving several thousand dollars a month versus staying and continuing to make payments. Furthermore, without any equity in the home, you are not creating value by making mortgage payments as you traditionally would have when you had a nice equity stake in your residence.
The advantages of walking away can be quite clear, but what are the downsides? First and foremost, you will be significantly hurting your credit score should you incur a foreclosure on your record. Walking away from your mortgage will hurt your credit score for seven years — which is painful, but potentially not as painful as continuing to make payments on an upsidedown mortgage for another seven years. In some rare cases, the bank could possibly pursue what is called a deficiency judgement against you. This means that they sue you personally for the difference between your mortgage balance and the amount they end up selling your house for at auction.
Deficiency claims are rare, and they vary by state. Some states do not allow them whatsoever — it is important to check with a qualified legal professional to ascertain what the applicable rules are in your state. Foreclosure used to entail great stigma. This is no longer the case, and the banks themselves with their chicanery and taxpayer bailouts have contributed to most of society having sympathy with those choosing to walk away. In the end, this decision is driven by your own personal circumstances — there are pro’s and con’s. Whatever you decide, keep in mind that eventually you will emerge on the other side stronger for having gone through this difficult experience.