Walking Away from a Mortgage in 2017: Understanding Your Options
In 2017, the housing market had begun to recover from the Great Recession, but many homeowners still found themselves in challenging financial situations. For some, the idea of walking away from a mortgage seemed like the only viable solution. However, it's crucial to understand the legal, financial, and personal implications before making such a decision.
What is Walking Away from a Mortgage?
Walking away from a mortgage, also known as strategic default or jingle mail, involves stopping mortgage payments and allowing the property to go into foreclosure. The term "jingle mail" refers to the act of mailing the keys back to the lender, symbolizing the surrender of the property.
Why Consider Walking Away in 2017?
In 2017, several factors might have led homeowners to consider walking away from their mortgages. These could include:
- Being significantly underwater on the mortgage (owing more than the property is worth)
- Facing financial hardship, such as job loss or medical expenses
- Believing that the housing market would not recover in the foreseeable future
- Feeling that the lender had not provided adequate assistance during the mortgage modification process
Legal Implications of Walking Away from a Mortgage
Before deciding to walk away from a mortgage, it's essential to understand the legal consequences. In most states, lenders can sue for the deficiency balance, which is the difference between what the homeowner owes and what the property sells for at auction. However, some states have laws that protect homeowners from deficiency judgments.
Additionally, walking away from a mortgage can have long-term effects on a homeowner's credit score. A foreclosure can stay on a credit report for up to seven years, making it difficult to obtain credit, rent an apartment, or even get a job in some cases.
Alternatives to Walking Away from a Mortgage
Before making the decision to walk away from a mortgage, homeowners should explore all other options. These can include:
- Mortgage modification: Negotiating with the lender to change the terms of the loan, such as lowering the interest rate or extending the loan term.
- Short sale: Selling the property for less than the outstanding mortgage balance, with the lender's approval.
- Deed in lieu of foreclosure: Transferring the property title to the lender in exchange for forgiveness of the mortgage debt.
Tax Implications of Walking Away from a Mortgage
In 2017, the Mortgage Forgiveness Debt Relief Act allowed homeowners to exclude from their income up to $2 million of forgiven mortgage debt on their principal residence. However, this exemption was set to expire at the end of 2016, and Congress did not extend it. Therefore, any forgiven mortgage debt in 2017 was considered taxable income.
Walking Away from a Mortgage in 2017: A Case Study
In 2017, a couple in California found themselves in a difficult financial situation. They had purchased their home in 2006 for $500,000, but its value had since plummeted to $250,000. They had lost their jobs and were struggling to make their mortgage payments. After exploring their options, they decided to walk away from their mortgage and allow the property to go into foreclosure.
Here's a table summarizing their situation:
| Purchase Price | Current Value | Mortgage Balance | Monthly Payment |
|---|---|---|---|
| $500,000 | $250,000 | $350,000 | $2,500 |
After walking away from their mortgage, the couple's credit score dropped significantly, and they had difficulty finding rental housing. However, they were able to find new jobs and start rebuilding their financial lives. They also received a 1099-A form from their lender, reporting the forgiven debt as taxable income.
Walking away from a mortgage in 2017, or any year, is a complex decision with significant legal, financial, and personal implications. It's essential to weigh all the options and seek professional advice before making a decision. In some cases, walking away may be the best choice, but it's crucial to understand the consequences and be prepared to face them.
