Laila Keith
Getting out of a mortgage can be a challenging and stressful process. While stopping mortgage payments may seem like an attractive option, it can lead to serious repercussions such as foreclosure and a damaged credit score. Therefore, it is important to explore alternatives and seek expert advice. Homeowners facing financial difficulties should speak with their lender and consider options like refinancing, renting out the property, or selling the home. In some cases, walking away from the mortgage through a short sale or voluntary foreclosure may be the best choice, but it is crucial to understand the potential consequences. Seeking guidance from housing counseling agencies, attorneys, and financial professionals can help individuals navigate the complexities of getting out of a mortgage while minimizing negative impacts on their financial well-being.
How to get out of a mortgage
| Characteristics | Values |
|---|---|
| Stopping mortgage payments | Tempting but not recommended as it can lead to foreclosure and damage to your credit score |
| Deed in lieu of foreclosure | Transfer ownership of your home to your mortgage company with no further financial responsibility for the mortgage |
| Short sale | Sell your home for less than you owe on the mortgage; the lender receives all proceeds of the sale |
| Foreclosure | The most painful process that leaves homeowners financially distressed; should be the last resort |
| Refinance | Obtain a new mortgage loan to repay your old one, leaving you with a single loan and monthly payment |
| Reverse mortgage | Receive monthly payments based on your home's value; used by individuals of retirement age who need added income |
| Right of rescission | Cancel and back out of a home equity loan or line of credit within the first 3 days of closing upon it |
| Renting | Renting out your home allows you to maintain ownership while making loan payments; becoming a landlord requires significant work |
| Selling your home | Selling for cash is cost-effective as you don't need to pay a real estate agent or invest in making your property sale-ready |
| Partition action | A legal process that allows co-owners of a property to divide their interests and force the sale of the property |
| Power of attorney | A legal document that allows you to appoint someone to act on your behalf in financial or legal matters |
Selling your home
The first step is to calculate your home equity, which is the difference between how much you owe on your mortgage and how much your home would sell for. You can determine your financial stake in the home by calculating your home equity. If you don’t have enough equity to pay off your mortgage, then you may reconsider selling your home or seek other options, such as getting your lender to agree to a short sale.
The next step is to list the home for sale to find a buyer. Your home must be valued over the cost of your balance. Most people sell their homes through a local real estate agent who is experienced in selling houses with mortgages, but you can also try selling the home yourself via a for-sale-by-owner (FSBO) transaction. A professional home inspection can help you determine if your house is worth more or if it needs some extra work.
After selling a home with a mortgage, you’re required to first pay off the remaining home loan balance and then any other liens, transaction costs, and closing costs. Selling a house with a mortgage can become problematic if the homeowner owes more on their mortgage than the home is worth. In this case, a Mortgage Release can be a good alternative to foreclosure.
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Deed in lieu of foreclosure
A deed in lieu of foreclosure is a document that transfers the title of a property from the property owner to their lender in exchange for relief from the mortgage debt. In other words, the homeowner voluntarily turns over ownership of their home to the lender to avoid the foreclosure process. This option is usually only taken as a last resort when the homeowner has exhausted all other options, such as a loan modification or a short sale.
A deed in lieu of foreclosure has advantages for both the borrower and the lender. The borrower is relieved of the burden of the loan and can avoid the public notoriety of a foreclosure proceeding. They may also receive more generous terms compared to a formal foreclosure, and it will harm their credit score less than a foreclosure would. The lender saves money by avoiding the time-consuming and costly expenses of extended foreclosure proceedings, and there is a lower risk of borrower revenge (metal theft and vandalism of the property).
To be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current value of the property.
If you are considering a deed in lieu of foreclosure, make sure that it covers the entire amount of money you still owe on the mortgage loan. Ask your lender or servicer about help with your relocation expenses through private programs sometimes called "cash-for-keys". If you live in a state where you are responsible for any deficiency (the difference between the value of the property and the amount you still owe on the mortgage loan), you can ask your lender to waive the deficiency, and get it in writing.
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Short sale
A short sale allows you to sell your home for less than what you owe on the mortgage and exit your obligation to the lender. This strategy is often used by homeowners who are facing financial difficulties and are
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Refinancing
Secondly, refinancing can help you tap into your home's equity. This can be done through a cash-out refinance, where you take out a larger mortgage, pay off the old one, and keep the remainder in cash. This cash can be used for home repairs, debt repayment, or other expenses. However, it is important to consider the cost and potential interest accrued on this cash.
Thirdly, refinancing can help you pay off your loan faster by shortening the loan term. This can be a good strategy if you plan to stay in your home for the long term, as it may increase your monthly payments but will reduce the overall interest paid over time.
It is important to note that refinancing requires qualification, and a good credit score will improve your chances of approval and the rates offered. Additionally, refinancing comes with closing costs and fees, typically ranging from 2% to 6% of the outstanding principal balance, which should be considered when deciding whether to refinance.
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Renting
Step 1: Understand your mortgage contract and lender policies
Firstly, carefully review the fine print of your mortgage contract. Some lenders may have strict occupancy requirements or even ban rentals outright. Most lenders will allow renting after you have lived in the property for a certain period, typically 12 months or more. Be sure to check your specific contract terms and conditions. Also, understand the type of loan you have, as certain loans, such as USDA, VA, and FHA loans, are intended for primary residences and may have restrictions on renting.
Step 2: Discuss with your lender
Before making any decisions, contact your mortgage lender and be transparent about your intentions. They may require you to meet certain conditions, such as obtaining 'consent to let', which grants permission to rent on your current mortgage for a specified period. Lenders may charge a fee or require you to wait before renting. It is important to get their approval to avoid any allegations of mortgage fraud, which is a serious matter.
Step 3: Understand the financial implications
Step 4: Comply with laws and regulations
Familiarize yourself with landlord-tenant laws and ensure you and your property comply with them. Also, if you are part of a Homeowners Association (HOA), check their rental policies, as they may have specific requirements or restrictions on rentals.
Step 5: Decide on management
Consider how you want to manage the rental property. You can choose to manage it yourself or engage a property management company to handle various aspects, such as tenant screening, rent collection, and maintenance. This decision will depend on your time availability and willingness to take on the responsibilities of a landlord.
Step 6: Prepare for the emotional aspect
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Frequently asked questions
Refinancing is a surefire way to get out of a mortgage. This involves taking out a new mortgage loan to pay off the old one, leaving you with a single loan and monthly payment.
A deed in lieu of foreclosure is an arrangement where you give your mortgage lender the deed to your home, releasing you from your mortgage responsibilities and avoiding foreclosure on your credit report.
A short sale is when homeowners facing financial hardship agree with their lender to sell their home for less than they owe on the mortgage. The lender receives all proceeds of the sale.
A partition action is a legal process that allows co-owners of a property to divide their interests. In the case of a divorce, a partition action can be used to force the sale of the property and distribute the proceeds between the divorcing spouses.
If you're having trouble paying your monthly mortgage, contact your mortgage servicer as soon as possible to discuss your options and avoid foreclosure.
