It’s never an easy decision, but if you are behind on house payments and find yourself significantly upside down with your mortgage, there’s not much point, from an economic perspective, in trying to keep your house unless you can get your mortgage payment reduced under the federal Home Affordable Modification program, or by working something out with your lender (and many lenders do want to keep you in your house).
It probably makes sense to give up your house if it is now worth at least 25% less than you paid for it. That’s because your house’s value would have to appreciate by as much as it dropped for you to come out even, and that will likely take several years.
What if you bought your house with no down payment (or almost none), or took out an interest-only loan? In that case, you had no equity to begin with—so right now you could give up the house without losing much, financially, right? It’s true that you wouldn’t lose any equity by walking away, but you could end up liable for some or all of your mortgage or home equity loan debt. You might (especially with a home equity loan) be taxed on the amount of the mortgage debt lost by the lender. (For more on the tax consequences of foreclosure, see our article on how the IRS treats canceled mortgage debt.)
If you decide that the smartest course is to give up the house, you have more decisions to make—important ones. Just how you choose to proceed can make a very big difference to your financial future.
Your options include:
- a short sale—that is, getting the lender’s permission to sell the house for less than you owe
- a deed in lieu of foreclosure (getting your lender to accept the deed back in exchange for an agreement to call off the foreclosure)
- letting the foreclosure happen, staying in your house payment free for months until you get a notice to leave, and building up your cash reserves, or
- filing for Chapter 13 or Chapter 7 bankruptcy to eliminate foreclosure-related liabilities and delay the foreclosure sale for at least several months, thereby extending the time you can remain in the house payment free.
Although it’s always painful to give up a house, try to keep in mind that doing so may make things much easier for you and your family in the long run. You will probably be able to stay in the house for months without making any more mortgage payments—giving you time to save some money, which will make moving easier. And if it’s any consolation, remember that you are among literally millions of Americans who find themselves in the same boat during these tough times.