If you’ve reached a financial crisis and you’re running out of money and options, you may be contemplating walking away from your mortgage as a means of relief.
Part of your decision should be based on whether you have a recourse or non-recourse loan.
With a non-recourse loan, nothing further happens with the lender. “Non-recourse” means that the bank can have the house or what’s left of your mortgage loan, but not both. You can turn over the key and walk away, free and clear.
If your mortgage contract allows it, the bank can’t come after you for any outstanding balance. Building in a non-recourse clause typically means a higher interest rate, but it’s a safety net you’ll be glad to have if you ever need it.
With a recourse loan, borrowers owe the entire mortgage amount even if they deed the house back to the bank. The lender can sell the house for less than the outstanding mortgage amount and pursue you to collect the difference, plus legal costs and fees.
Home equity loans and refinancing are almost always recourse loans, even in states that require non-recourse mortgages when buying a home.
But before deciding to walk away, consider the real, long-term costs of what some experts call a strategic default.
Reasons Why You Might Walk Away
The top reason borrowers strategically default on their mortgages is because they’re underwater — meaning their home is worth less than what they still owe. A housing market crash can put you in this situation.
Walking away from your home can also feel like an ethical dilemma, but many people think of it as a business decision instead. Whether you walk away or refinance, the ultimate goal is the same: significantly improve your financial situation.
Some borrowers have walked away from underwater homes and rented similar properties in the same area for half the mortgage cost. That decision is much easier when you can keep your surroundings, lifestyle, and neighborhood intact while paying far less each month.
In non-recourse states, where lenders can’t go after your assets for money owed, walking away can free you from a mountain of debt. This creates flexibility to recast your budget so you can pay off other debts, save for retirement, and get your overall fiscal situation in better shape.
Beyond the financial stress, owning a home is a physical burden too. Renters have fewer responsibilities and costs than the constant maintenance that comes with homeownership, and many people are drawn to that simplicity.
Some people opt for a short sale instead, which lets you surrender your home to the bank without the long-lasting mark of a foreclosure on your credit history. However, a short sale can be long and frustrating, since you cede control to the bank over how much your home sells for. Walking away skips that process entirely.
Reasons Why You Shouldn’t Walk Away
The first and biggest reason not to walk away is the damage to your credit. Walking away can drop your FICO score by 200 points or more.
Since credit scores factor into so many things, this could hurt your chances of getting a new job, renting a place, or qualifying for reasonable rates on future credit for years to come. Credit card companies often cancel cards or lower limits after missed mortgage payments, too.
If you default on your mortgage, it will take years to qualify for another one. Foreclosed borrowers can expect to wait two to five years before getting a new mortgage — and borrowers who voluntarily walk away may wait even longer.
There’s also a tax consideration: the IRS treats forgiven debt as income. If you borrow money from the bank and never pay it back, the agency views you as financially ahead of where you started — which means you could face a substantial tax bill on top of your other financial challenges.
Additionally, your other assets may be at risk in recourse states, where lenders can pursue borrowers for money still owed. When you walk away, lenders look to collect the difference between what you owe and what they recover by selling your former home — a process that can take a year or more to resolve.
If the sale doesn’t make them whole, lenders may come after your other assets, including savings accounts, vehicles, second homes, and wages. They can sue in civil court and attempt to obtain a writ of execution to reach your remaining assets to satisfy the debt.
The Bottom Line on Walking Away
Walking away from your home is a thorny issue. Before you do, consider opening a dialogue with your lender or servicer to see if any cost-lowering or principal-reduction options are available. You should also talk to a real estate lawyer and other professionals about the legal and financial ramifications of walking away.
One option worth exploring before you make a final decision: refinancing into a more affordable payment. If a lower rate or a different loan structure could bring your mortgage back within reach, start your refinance with Refi.com to see what you may qualify for. It only takes a few minutes to find out whether refinancing could help you stay in your home and avoid the long-term financial fallout of a strategic default.
