Legal Solutions for You,
Your Family & Your Business

Give Up Your House

For some people, it makes economic sense to give up the house and move on. If so, there are several ways to say goodbye to it; you’ll want to choose the method that causes the least financial and emotional upset to you and your family. (There’s much more about making this decision in Ch. 3.)

Walk Away

If you have only a first mortgage, you may want to simply leave. But you’ll want to do this only if the lender cannot sue you if, after the foreclosure sale, the mortgage still hasn’t been paid off. (If the lender can’t sue you in this situation, you have what is called a non-recourse loan; check your state’s law in the appendix to see whether or not the lender could come after you if a foreclosure sale doesn’t yield enough to repay the mortgage.) The lender will foreclose on the property to regain title, but you’ll be cut loose without owing anything to the lender. You might, however, be liable for income tax on the amount the lender comes up short (that amount may be considered income to you because you won’t have to pay it back).

If you have a second or third mortgage, walking away won’t get you off the hook for those debts—or for tax on the amount the lender writes off.

Arrange a “Short Sale” Without Foreclosure

You can arrange with your lender to sell the house, without foreclosure, for less than you owe on the loan. This is called a short sale. If you live in a state that allows the lender to sue you if the house doesn’t sell for a high enough price to pay off your mortgage, a short sale can be a good idea, but only if you get your lender to agree (in writing) to let you off the hook.

If you have a second or third mortgage, you’ll also have to get those lenders’ permission, which may be next to impossible given that they won’t get anything from the sale. Without permission from these mortgage holders, a sale of any kind won’t be possible in nearly all cases because these unpaid liens would remain on the title.

Some people prefer short sales to foreclosure (and to bankruptcy) because of the conventional wisdom that a short sale will have a less negative impact on your credit score. (More about that in Ch. 4.)

Hand Over the House Without Foreclosure

You may be able to get your lender to let you deed the property over so that no foreclosure is necessary; this is called signing a “deed in lieu of foreclosure.” But before you go this route, you’ll want to have an agreement (in writing) that the lender won’t go after you for any deficiency that remains after the house is sold. And once again, this remedy probably won’t be available if there are second or third mortgages. As with short sales, some believe that a deed in lieu of foreclosure will be better for your credit than a foreclosure or bankruptcy.