How to Walk Away From a Mortgage Without Ruining Your Credit

If you find yourself in a difficult situation financially it can be tough to know what to do about your home. Should you choose a short sale or deed in lieu of foreclosure? Should you stick it out even if a foreclosure is inevitable? The reality is none of these situations are ideal and have different pros and cons but you do have options, read on to learn how to walk away from a mortgage without ruining your credit.

When Should You Walk Away from Your Mortgage

If you do the math and find that the amount you owe on your mortgage is more than the amount your house is worth then you are “underwater” in your mortgage. Maybe you’ve hit hard times financially and you are unable to make your mortgage payments. Perhaps you are needing to move — relocate for a job or family reasons — and your house just isn’t selling due to the condition it is in. Either way, you might be in a place where the idea of “strategic default,” — choosing to walk away from your mortgage — looks more appealing. The problem with strategic default is that it causes a big ding in your credit score that can last for years, making it hard to move on financially or to buy another home down the road. Read on to see what your options are and to learn how to walk away from a mortgage.

Short Sale

A short sale is when you sell your property for less than you owe on your mortgage. All of the proceeds from the sale go to the lender and then the lender can either forgive the difference owed or get a deficiency judgment against you, requiring you to pay the lender all or part of the money that is still owed on the mortgage. Your mortgage lender must first approve a short sale.

Pros to a Short Sale

There are times when the bank will forgive the difference, especially if you’ve been able to show proven hardship such as divorce or loss of income, allowing you to get out from your mortgage and without irreparably harming your credit score. Short sales help you to avoid the legal action and cost of a lengthy foreclosure process, lessening your financial burden and providing a solution to your financial problems.

Cons to a Short Sale

If the lender does file a deficiency judgement against you then the judgement will appear on your credit report and have a negative impact like a foreclosure. Either way, a short sale will negatively affect your credit score, the amount will be determined by what the lender reports on the short sale, how high your credit score was to begin with and if you owe a deficiency.

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 the lender in exchange for being forgiven any remaining mortgage debt. This step is usually sought after as a means to avoid foreclosure. This is considered an option to be considered only after you’ve tried a short sale or tried to get a loan modification. Both the lender and seller must agree to the deed in lieu of foreclosure.

Pros to Deed in Lieu of Foreclosure

Going through a deed in lieu of foreclosure helps you avoid a lengthy foreclosure process and the fees involved with that. This is a faster process than a foreclosure and allows you to get out from your debt and move on.

Cons to Deed in Lieu of Foreclosure

Unfortunately, if you were hoping to walk away from your mortgage without ruining your credit, then this step won’t help much with that. Deeding a house back to the bank will create a negative effect on your credit rating and you will have to wait several years before you can get another mortgage. Typically you’ll have to wait four years before you can get approved for a new mortgage.


A foreclosure happens when you completely default on a loan so the bank seizes the property. If you miss a certain number of monthly payments then the bank has the legal right to start the foreclosure process and to recover the amount you owe on your home by selling the property to a new owner.

Pros to a Foreclosure

There aren’t any pros to letting your home go into foreclosure — it affects your credit in a major way and it would be much better to reach out to your bank and work with them or sell your house. Click here to read all the details of the foreclosure process.

Cons to a Foreclosure

Foreclosures hurt your credit score in a big way, a dip of 200 or 300 points. This means it will be harder or even impossible to get a credit card or loan for several years after your foreclosure. If you are able to secure a loan or line of credit then you will be charged higher interest rates. Potential employers sometimes look at credit scores as well so it could also impact your ability to get a job.

A foreclosure stays on your credit report for seven years.

How to Walk Away From a Mortgage Without Ruining Your Credit

There is really only one way to walk away from your mortgage without ruining your credit and that is to sell your home. If your home isn’t selling in the time frame you need it to for financial or job or other reasons, or if your house is in need of repairs that are making the house harder to sell, you still have options.

Thankfully there are house buying companies like Gary Buys Houses that can purchase your home– no matter the condition– with a fast cash payment. You get the peace of mind from being out from under your mortgage and, best of all, your credit score stays in tact allowing you to purchase homes, get a credit card or a loan for a car without the credit repercussions of a short sale, deed in lieu of foreclosure or foreclosure. Gary has been in the business for more than 12 years and is a local Utah company that is ready to buy your house and save your credit score.