real estate

Go through foreclosure or walk away?

Steve McLindenq_v2.gifDear Real Estate Adviser,
What is the difference between going through a foreclosure and simply walking away and mailing the keys to the bank?
-- Charko

a_v2.gifDear Charko,
The lending industry has even coined a term for what you're pondering instead of foreclosure. It's called jingle mail, after those sets of keys that go jingling around in the incoming mail.

Realize that if you do this, your home will still face the foreclosure process. And as the lender's foreclosure petition slowly works its way through the courts, an increasing number of delinquent payments will be layered onto your credit report because you are still technically the owner of the house, even if you mailed in the keys.

It is far better to ask the lenders if they will accept a short sale or to simply submit your house to the bank in a "deed in lieu of foreclosure" proceeding.

A short sale is less toxic to your credit rating than a standard foreclosure because it is listed as "settled debt" on credit reports. However, you must get the lender's approval to sell the home for less (or "short") of what you owe, and that approval won't always be granted because the lender takes the loss for the balance owed in this scenario.

By the way, you will be asked to prove your hardship. Additionally, the lender can still technically go after you following the sale to collect the difference, but generally does not because of the legal costs involved and the fact that there is usually little or nothing to be recovered these days. However, know that many short-sale attempts fail and that puts you back to square one.

The deed in lieu of foreclosure approach is faster than a short sale with about the same possibility of you being pursued by the lender for the difference. However, in a deed in lieu, you are contacting the lender and officially stating that you can't make the payments and believe foreclosure is imminent, so you are legally handing over ownership to the bank. This saves the bank the time and expense of foreclosing on you. To avoid this, many banks will consent to renegotiating mortgage terms rather than adding yet another home to the already-bloated inventories of real estate owned by the banks, also known as REOs.

One caveat: A deed in lieu action may linger longer on your credit score than a simple dismissed bankruptcy. Many file for bankruptcy after falling into foreclosure when the lender doesn't consent to a short sale or deed in lieu arrangement.

In fact, a bankruptcy is far more fiscally prudent than just mailing in those keys.

Good luck!

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation.  Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy.  Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Real Estate Adviser columns and more stories about mortgages. To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page, and select "Buying, selling a home" as the topic.

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