A home mortgage is often the largest expense a person must face in her lifetime. During times of financial distress, such as after a job loss, lengthy hospital stay or emergency surgery, the monthly mortgage payments can become too much to afford. You have several options to free yourself from unaffordable mortgage payments.
One of the simplest ways to walk away from your mortgage is to allow your house to go into foreclosure. To do this, simply stop making your monthly mortgage payments, allowing your credit score to drop by as much as 100 points. After a period of two to six months (depending on your state of residence), your mortgage lender will send you a "notice of default," telling you to pay the past due balance immediately. Once you fail to pay, the lender will foreclose on your home, selling it at a sheriff's auction to the highest bidder. You will need to find a new residence and will suffer a 250- to 280-point drop in your credit score.
Deed-in-Lieu of Foreclosure
A deed-in-lieu of foreclosure is when an individual moves out of his home, signs over the deed to his home to his mortgage lender and mails said company his keys. A deed-in-lieu leads to much of the same results as foreclosure, including losing your home and taking a 250- to 280-point hit to your FICO score. However, opting for a deed-in-lieu instead of foreclosure will save you money in court and collection costs.
In a short sale, you sell your home to another individual for less money than you owe on your mortgage. Doing this allows you to get free of your mortgage payment, however, your mortgage lender must approve the sale, which his highly unlikely in cases where the short sale amount is much lower than the balance of the mortgage. If your lender approves the sale, it may have the right (in certain states) to sue you for the remaining mortgage balance. A short sale causes a 80- to 100-point drop in your credit score.
Chapter 7 Bankruptcy
If you cannot afford to pay your mortgage, one way to free yourself of your obligation is to file for Chapter 7 bankruptcy. Chapter 7 gives you a release from your mortgage debt in exchange for surrendering your home to your mortgage lending agency. To file for Chapter 7, your monthly income must be below your state's median income (see Resources). If your income is equal to or above your state's median, your "aggregate current monthly income" over the past five years must fall below $11,725 (as of February 2011), according to the United States Courts. Chapter 7 bankruptcy will lower your credit score by 160 to 220 points.