Once it appears that foreclosure is inevitable, many people pack up their belongings and their families and immediately look for a new place to live. They fear losing reliable shelter and want to find another home as soon as possible where they will feel secure. Staying in a house facing foreclosure can be terrifying if you think you might end up out on the street. And it may be unbearably depressing if you are reminded every day that you won’t be living there indefinitely.
While these reactions to foreclosure certainly are understandable, foreclosure can actually be a time of opportunity. You will have enough time to find a new place to live. Meanwhile, it may prove to be a big financial advantage to stay put for a while—maybe a long while.
So try to put fear and negativity aside as you assess your options to come up with the best choice for your circumstances. This chapter lays out the basic approaches to giving up your house and the advantages and disadvantages of each.
Giving Up the House: Your Options
- Let foreclosure work for you: Stay in the house as long as possible without making any payments, to save money for a future move.
- Short sale: Offer the house for sale and persuade the lender to accept the offer and let you off the mortgage.
- Deed in lieu of foreclosure: Persuade the lender to let you sign over the deed in exchange for cancellation of foreclosure.
- Walk away: Move out when it suits you and let the foreclosure proceed. Works best when your lender can’t sue you for a deficiency.
- Negotiate a mortgage modification: Engage in negotiations, even if you think your efforts will ultimately prove unfruitful, to avoid being labeled a "strategic defaulter" when you apply for a mortgage in the future.
- File for Chapter 7 or Chapter 13 bankruptcy: Eliminate any deficiencies or taxes you owe as a result of the foreclosure or other remedies.
Talk to an expert to see how your choice will affect your credit. It’s not possible to really know what effect any of these actions will have on your credit—any wisdom you hear from a credit or real estate industry insider now is likely to be out of date when you get around to needing it. So when you’re ready to decide which approach to take, talk to a HUD-approved housing counselor (see our article on using a HUD-approved housing counselor) about how it might affect your credit. But don’t let credit scores be the main consideration. It’s possible to “live long and prosper” without running on the credit hamster wheel.