Relocating comes with a unique set of challenges, including finding new living accommodations and making new friends. You may owe more than your home is worth and hope for a quick sale, but when that doesn’t happen, you're in a jam. Saddled with your mortgage payment, the cost of moving and finding new housing, your funds can quickly become depleted, compounding the problem. You have a few options -- some good, some bad -- the worst being foreclosure on the property.
Your lender may consider a short sale if you are willing to walk away from the property. A short sale occurs when you sell the property for as much as you can get. The lender either writes off the remaining balance, or you continue to pay the bill until the deficiency balance is paid in full. For a short sale to occur, the lender must agree to the purchase price and sign off on the paperwork. According to Nolo.com, a short sale negatively affects your credit rating, although the effect may be less than a full foreclosure.
Deed-in-Lieu of Foreclosure
In a deed-in-lieu of foreclosure, you return the keys to the lender and walk away from your home. The lender does not go through the foreclosure process, but instead claims the property and sells it. Just as in a short sale, you may end up paying off the rest of the loan, or the lender may write it off. A deed-in-lieu looks slightly better on your credit rating, but your score still takes a significant hit.
The ultimate consequence of walking away from a mortgage loan is foreclosure. The lender takes legal steps to take full control of the property. Your lender sells the property at auction and sends you a bill for the rest. In non-recourse states, the lender cannot pursue a deficiency judgment and writes off the deficiency balance. Foreclosure comes with several consequences that could impact your life for up to seven years.
Consequences of Foreclosure
According to CNN Money, foreclosure drops your credit score by 85 to 160 points. It stays on your credit report for seven years, making it very difficult to receive future credit. If the lender writes off the deficiency balance, you may face an increased tax burden. The IRS treats forgiven debt as taxable income that you must claim. In turn, the amount of taxes you owe increases. You also don't qualify for another mortgage for quite some time. Government-backed loans are out of your reach for at least three years. Traditional lenders may continue to say no for the entire seven years the entry is on your credit report.
Contact your lender and ask for a loan modification. If you're facing a financial hardship due to relocation, your lender may modify the terms of your mortgage contract. You still own the house and the total bill, but the lender defers interest, lowers the interest rate or extends the length of your loan, which reduces your monthly payment. With that slimmer monthly payment, you may be able to afford the property until you can sell it. If the lender offers you no options, contact the federal Home Affordable Refinance Program, which contracts with lenders to modify underwater home loans.
You already own the property. Consider making it work for you. Rent out the property to help cover the mortgage payment until you reach positive equity in the property. At this point, you may put it on the market to sell. Once it sells, it's no longer your problem.
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