protect your credit

Walk away from your mortgage while protecting your credit

Walking away from your mortgage is the best way to ruin your credit score for a loooong time. Do not fret, however, for there are strategies that would allow you to walk away without damaging, and even improving, your credit score.

The simplest way to walk out of a mortgage without ruining your credit is to sell the house. If selling the conventional approach is not an option for you, working with a real estate investor is the next best thing. Depending on how much equity you own and what state you live in, several strategies would allow you to walk away Scott-free. For example, an experienced investor could employ one or a combination of the following strategies to help you out of the situation:

  • Cash offer
  • Loan assumption
  • Subject to sale

Consequences of simply walking away

If you’re facing a dire situation — which many people who walk away are — leaving without a game plan will hurt you financially. For starters, you will lose the house to foreclosure, your credit score will take a ~200 point hit, and your lender may come after you with a deficiency of judgment.

Furthermore, even after your credit score recovers, borrowing money in the future will be extremely difficult. Would you lend money to someone who has a history of not paying you back?

No matter how difficult your situation seems, there is almost always a better solution. Walking away may solve the problem in the short term, but it will leave lasting damage in the long run.

Not to mention that, if you own a decent amount of equity in the house, you will lose a lot of that equity during foreclosure. What follows are the most common repercussions of blindly walking away.

You can miss out on profit

Walking away and letting the house fall into foreclosure is a good way of leaving equity on the table. Lenders will add up any missed payments plus processing fees and subtract them from your equity.

For example, the house falls into foreclosure, and the lender sells it at auction for $100,000. At the time of the sale, you owed $85,000 and were behind on four payments totaling $4,000. On top of that, the total fees amount to $3,000 which, along with your missed payments, are to be deducted from your equity.

In this example, you will take home $8,000 instead of the original $15,000 that was owed to you. You now have a foreclosure on your credit report and $7,000 that you left on the table by walking away.

The house will be foreclosed

The most obvious result of walking away from your mortgage is foreclosure. The process varies from state to state, but, according to, an uncontested foreclosure can be completed in around 2-3 months.

As illustrated above, foreclosure is a good way to ruin your chances at borrowing money anytime soon. Even with that information in mind, many homeowners — particularly those whose mortgage is upside-down — believe that foreclosure is the only way out.

That is not the case, however, as there are strategies that would allow you to walk away without damaging your credit.

Tarnished credit report

This is relatively self-explanatory as most people understand the value an excellent credit score can have on your finances. Similarly, a bad credit score stemming from foreclosure will be seen in a negative light by the credit bureaus.

According to Experian, the largest credit bureau in the world, a foreclosure will show on your credit report for up to 7 years after the original delinquency date.

With a foreclosure on your credit report, taking out student loans, car loans, and a future mortgage will become more difficult for you. Also, some government employers such as the TSA and the U.S. Air Force, have guidelines pertaining to an individual’s creditworthiness.

Tax implications

In the eyes of the IRS, foreclosure is treated as a financial transaction. In other words, debt that was once yours now isn’t, and you could be subject to capital gains/loss tax. Keep in mind, however, that no two cases are alike.

There are too many variables at play for you to make a sound decision without seeking help from a seasoned tax professional. In short, whether or not you can be held liable can depend on the type of mortgage, the state in which you reside, and how you file your taxes.

Recourse loan

If after the sale there is still money owed on the debt, the lender can come after your assets and even garnish your wages. This type of loan is not as common as it allows the lender an avenue for recouping their losses. Additionally, a recourse loan may allow your cancellation of debt income to be taxable.

Non-recourse loan

This type of loan is the more common of the two as it favors you, the borrower. In this case, all the lender can do is glare menacingly from afar. If they take a loss from the foreclosure — which they probably will — the lender would have no choice but to absorb it.

In the case of a non-recourse loan, the cancellation of debt income is not taxable. Even so, capital gains tax may still apply in your situation. When it comes to walking away from your mortgage and the subsequent foreclosure, ALWAYS seek professional help. Better yet, don’t walk away and avoid these issues altogether.

Is there a right way to walk away from a mortgage?

Several strategies at your disposal would allow you to walk away without harming your credit. Admittedly, most of them require the help of either an attorney, a real estate agent or a real estate investor.

Above all, doing things by the book will ultimately get you out of the situation and towards a better place financially.

Sell the house

If you own a decent amount of equity in the property, selling the house before walking away is the best option for you. The process to sell your house through a real estate agent is cut-and-dry. All you need to do is find yourself a local Realtor, and they’ll take it from there.

Yes, it might take longer than you’d like, but it would prevent you from damaging your credit. If you own little equity or are upside-down on your mortgage, however, selling through a real estate agent will probably not work for you.

You’ve done the math and calculated that selling the conventional way will cost you money out-of-pocket. How can you avoid this? By working with a local real estate investor. They deal with these types of situations often and would be more than happy to help you.

Work with a real estate investor

Let’s face it, walking away from a mortgage is nobody’s first choice. That being said, doing it without harming your credit can be relatively easy with the help of a real estate investor.

Experienced investors work alongside homeowners who find themselves underwater, in foreclosure or want out of their mortgage. All in all, they serve to fill the niche left open by agents who cannot effectively help their clients.

On the other hand, you should not seek help from investors if your situation does NOT call for it. Understanding whether or not working with an investor is right for you, depends entirely on your situation.

Working with an investor to save your credit

A seasoned investor can get you out safely and on a timeframe that works for you. They’re able to do this by structuring offers based on your unique situation. Having low equity, being upside-down on the mortgage or simply wanting out, all affect how your offer is structured.

Subject to sale

In a subject to sale, the investor would take over your mortgage, as-is, and you would be free to do as you wish. The house, along with the monthly payments, would now be in the hands of the investor and your credit would be safe.

The advantages of a subject to sale for the seller are numerous. For one, you would sell the house as-is, pay little to no closing costs, and the closing itself would only take a few weeks.

Secondly, since the debt is still under your name, all of the payments would positively impact your credit report. To put it briefly, a subject to can be an excellent way to boost your credit while walking away from the mortgage.

An important caveat, however, is that the original debt still belongs to you. If the investor defaults, the damage would be done to your credit, not theirs. For this reason, your number one priority should be to find an experienced and trustworthy investor in your area.

Trusting someone else to make payments on your debt should not be taken lightly. Subject to’s work well if you’re behind on payments or are currently going through foreclosure. They tend not to do so well if your house needs a ton of work or if you own a lot of equity in the house.

Loan assumptions

In a loan assumption, the buyer assumes the mortgage terms along with the debt. You as the seller would walk away completely debt-free. In this case, a loan assumption would give you exactly what you’re looking for; it allows you to walk away from your mortgage and it protects your credit.

In practice, loan assumptions are extremely rare as they require a lot from the investor. Firstly, they have to go through your lender’s entire loan application process. Secondly, the investor is now carrying the debt under his/her name, affecting how they do business elsewhere.

When it comes to loan assumptions, you’d be hardpressed to find an investor willing to do them. Subject tos do the same thing gives plus they give the investor a layer of protection that a loan assumption cannot provide.

If you’re deadset on selling your house through a loan assumption, however, your best bet is to find an individual instead of an investor. Someone who is actively looking for a home to live in would likely have no issues going through the loan application process.

Cash offer

If you own a significant amount of equity and your house needs work, an investor can present you with a cash offer. As the name suggests, the investor would run his/her numbers and give an offer based on the after repair value (ARV) of the house.

When it comes to getting a cash offer, the primary thing you need to worry about is getting “low-balled.” Although not perfect, Zillow offers a tool that helps you estimate the value if your house.

When working with a cash offer, don’t be afraid to ask how they arrived at that amount. All investors speak of “fair and transparent cash offers,” but when push comes to shove, many of them won’t give you a direct answer.

Don’t just walk away from the problem

No matter how complicated, most problems in real estate have one or two viable solutions. Finding that perfect solution that gets you out of the mortgage while protecting, or even improving, your credit won’t be easy.

Even so, and with the right help by your side, walking away from your mortgage may only be a phone call away.