You may have seen news reports about upside-down homeowners choosing to walk away from their homes. Some firms report receiving "jingle mail," which is their term for borrowers mailing back their keys. However, walking away from a home doesn't immediately resolve the situation. Voluntary foreclosure is still foreclosure and it will still have long-term repercussions.
Voluntary Foreclosure with a Recourse Mortgage
If you bought your home with a recourse mortgage, then walking away or returning the keys may not relieve you from the debt. In a recourse state, not only can the lender take your home, but they can also sue you for the difference between the eventual sale proceeds and the mortgage balance.
Voluntary Foreclosure with a Non-Recourse Mortgage
If you have a non-recourse mortgage, then your lender can only seize your home if you default. They can't sue you for a deficiency judgment if the sales price fails to satisfy the mortgage debt. However, most home equity loans or second mortgages have recourse clauses, so your second lender can still sue you if you walk away from the home.
The Effect on Your Credit
Whether you choose voluntary foreclosure or go into default involuntarily, the effect on your credit is the same. It still appears as a foreclosure and will still prevent you from qualifying for a mortgage and many other forms of credit for several years. If you are able to qualify for credit following a foreclosure, the interest rate will be very high.
Alternatives to Voluntary Foreclosure
Before you walk away from your home or mail back the keys, contact your lender to discuss your options.
Deed-in-Lieu: If you're determined to give up the home, the lender may accept a deed-in-lieu of foreclosure. Although this option will still hurt your credit, you'll avoid the paperwork, hassle of the actual foreclosure, and a possible recourse action.
Short Sale: Your lender may also agree to a short sale, which will allow you to sell your home rather than abandon it. A short sale is better for your credit than a foreclosure.
Loan Workout: There are now more loan workout programs available. If you qualify, your lender can move you into a new loan with payments you can afford and a fixed interest rate that will keep your payments at that level.
Even if your home is currently worth less than the mortgage balance, home values do improve over time and you will eventually be solvent again. If you can stay in the home for several more years, a loan workout will give you enough time to see home values stabilize and possibly build equity.
Although it sounds tempting to just walk away from your home, you should always consider both the short-term and long-term repercussions of this action. It's always best for your credit to find a responsible solution.