Whether you have a recourse or non-recourse mortgage is an important consideration before you walk away from your home and debt. With a recourse mortgage, or in a recourse state, returning your home to the lender, even if it is voluntary, will likely not remove your obligation. States with recourse laws allow lenders not only to take defaulting borrowers' homes but also to sue them to reclaim any loss sustained because of a difference between the price for which a home sells and the amount owed on a mortgage. This may be called a deficiency judgment.
Non-recourse mortgages do not allow lenders to sue borrowers for deficiency judgments; they only allow lenders to seize the homes of borrowers in default. You should be aware, however, that most home equity loans and second mortgages have recourse clauses, so you may still be in danger of being sued after walking away from your home.
The Effects of Foreclosure
Though it may seem as if you should get some "recognition" for returning your home voluntarily, the system doesn't work that way. The foreclosure will appear on your credit report in the same way as any foreclosure would, and the long-term repercussions will be the same. You will likely have difficulty qualifying for loans, mortgages, and other forms of credit for years into the future. If you are able to qualify for credit, you may find that the terms are not favorable and the interest rate is high. Additionally, having a foreclosure on your credit record can cause landlords to be hesitant to rent to you. Even after you have left your home voluntarily, you may have difficulty finding another place to live. Fortunately, there are other options that you can consider to help you avoid foreclosure.
Considering Other Options
Before giving in to the repercussions of foreclosure, contact your lender and explore any alternatives that are available to you. One option that you may be able to work out with your lender is a short sale. In this case, you will sell your home rather than abandon it. Short sales do not harm your credit as much as foreclosures do. Another possible option is a deed-in-lieu. A deed-in-lieu allows you to return your home to your lender with less negative impact on your credit and to avoid potential recourse actions and deficiency judgments.
While it may not seem as easy as mailing your keys back to your lender, contacting your lender to discuss alternatives to a voluntary foreclosure will benefit you in both the long and short term.