Great news, distressed homeowners! If you aren’t eligible for the President’s homeowner assistance package and can’t negotiate a better deal on your mortgage, the New York Times says that turning in the keys and leaving your home may not be the end of your financial world. The Times mapped out a guide for dealing with the various players controlling your mortgage…

Your Lender: Lenders realize that this is a terrible time for everyone. You may be able to return your house and call things even, avoiding foreclosure with what’s known as a deed in lieu. Your bank might also be willing to allow a short sale, where you sell the house for less than the value of the mortgage.

If you’re already in foreclosure proceedings, you may be able to walk away without a chase. Several states, including Arizona and California, prohibit lenders from pursuing foreclosed borrowers. Don’t try this if you have lots of cash and are tiring of the payments on your beach house. A lawyer will be able to guide you out of your house toward the path to solvency.

The Taxman: Several states are following the federal government’s lead and won’t treat forgiven debts as income at least through 2012. Again, a lawyer can help you figure out if you qualify.

Your Credit Score: Yeeaahhhh, no way to escape this one. You’re going to take a big nasty hit and it’s going to stand out on your credit report for seven years. If it’s your only black mark, don’t sweat it too much. FICO may have to change their algorithm to downplay foreclosures. “To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that,” said Todd J. Zywicki, a law professor at George Mason University.

Regardless of what you choose, if you’re unwilling to spend any more money on your mortgage payments, spend a few dollars on a lawyer to help figure out your options.
Thoughts on Walking Away From Your Home Loan [The New York Times]
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