Advice on voluntary surrender of home to lender

How much more damage could I do if I just voluntarily surrender my house back to the lender?

I have a dismissed bankruptcy scheduled to fall off my credit in 2010. My house was included in the original bankruptcy as well as an automobile. Once the bankruptcy was dismissed I reached an agreement with the mortgage company to keep the house. However, I had incurred substantial fee's which I had to pay before they would reinstate the loan bringing my home loan basically back to where I started. The house isn't in the greatest neighborhood and I can't qualify for another mortgage, but i really want to move. My credit is horrible right now (under 500) and doesn't seem to be able to get any lower. How much more damage could I do if I voluntarily surrender the house back? It seems like surrendering the house would actually improve my score because my debt would be reduced. Any advice?

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Bill's Answer
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The voluntary surrender of a home in the manner you describe is often referred to as a "deed in lieu of foreclosure" in the mortgage industry. In this procedure, a borrower negotiates with the lender to turn over the deed to the lender in order to avoid formal foreclosure proceedings in the court system. I will explain more about voluntary surrender of a home in just a moment.

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I generally recommend negotiating a deed in lieu agreement when a homeowner can no longer afford his mortgage payments, has explored all other options to save his home, and when foreclosure is imminent.

It sounds like you are able to make your monthly mortgage payments, but that you would like to rid yourself of the home so you can move. Before you consider surrendering the property to your mortgage lender, you should do everything in your power to sell the home. If you can find a buyer, you should be able to rid yourself of the home without the credit damage caused by a foreclosure or a deed in lieu. For further information about foreclosure, you should review the foreclosure information from the Avoiding Foreclosure Web page.

Unfortunately, in the current housing market, many homeowners find themselves owing more on their mortgages than their homes are worth, a situation which the mortgage industry refers to as being "upside down" on a mortgage. Even if you cannot find a buyer willing to pay enough for the home to pay off what you currently owe, you still may be able to sell the property for less than the mortgage balance, though you will need to negotiate an agreement with your lender to accept less than the balance of the note to pay off the mortgage.

Selling a home for less than the balance owed on the mortgage is often called a "short sale." Such transfers must be approved by the lender prior to the sale. Lenders that agree to short sales will frequently forgive any balance remaining on the note after the sale proceeds are applied, though they usually require borrowers to provide documentation of financial hardship, such as job loss or unexpected illness, before they will approve a short sale.

Surrendering your home to your mortgage lender through a deed in lieu of foreclosure agreement will likely have a strongly negative impact on your credit rating and your ability to obtain a new mortgage. While I understand that your credit score is already quite low, it is possible that a voluntary surrender may drive your score even lower. In addition, this derogatory mark on your credit will likely appear on your credit reports for seven years, meaning that this "foreclosure" could damage you credit rating for much longer than your dismissed bankruptcy.

Recommendation

Explore all options available to you to avoid voluntary surrender or foreclosure of your home, as losing your home will likely hurt you financially and negatively impact your credit rating for many years. These credit problems could prevent you from qualifying for a mortgage for a new home, cause you problems leasing an apartment, and force you to pay significantly higher interest rates for any credit you are able to obtain, which could cost you thousands of dollars in interest charges.

To learn more about the foreclosure process, and possible ways to prevent foreclosure, I encourage you to visit the Bills.com Foreclosure page. See also Deed In Lieu Of Foreclosure vs. Short Sale and Home Affordable Foreclosure Alternatives Program.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

174 Comments

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  • EM
    Feb, 2013
    Emerita
    My husband and I filed for BK last Nov 2010. It was discharged March 2011. Although the house is included in the BK, we continue to pay our monthly mortgage. We owe $410k but the value of our property is only $210k. We are underwater by $200k. We are considering surrendering our house to the lender. What is the best way to do that? Should we do short sale? What is our liability? Are we going to pay taxes? We would appreciate your advice.
    1 Votes

    • BA
      Feb, 2013
      Bill
      Based only on the facts you shared, the answer to your personal liability for the mortgage question is, "No, you do not have liability for the mortgage because it was discharged in your 2011 chapter 7." However, if you signed a contract to reinstate your liability, which your lawyer almost certainly would have advised you not to, then the answer to your question is, "yes." Or, if you refinanced, which is unlikely, the answer would be yes. Consult with your bankruptcy lawyer to make certain you have no personal liability for the mortgage before you make any decisions about how to proceed.

      If you have no liability for the mortgage, then you have the option to walk away — allow a strategic default.

      You mentioned a short sale. Because you have no liability for the mortgage, I do not see a legal or financial reason to consider this option.

      You mentioned taxes. I do not see any unusual tax situation here, again assuming your personal liability for the mortgage was discharged in the chapter 7.
      1 Votes

    • AS
      May, 2013
      A
      I was in your same situation until I researched my answer and talked with someone at my county court. Yes, I was still responsible for paying HOA dues, taxes, and insurance even after I surrendered my property in a chapter 7 bankruptcy. That was until I found out I could use a Quit Claim Deed (QCD) to get the property I surrendered out of my name. The HOA organization knows if the property is in your name, you are responsible for paying your dues. No attorney will tell you this unless you pay them money to do a QCD on your behalf. Yes, the banks will get angry, but you just want them to take ownership of the property you surrendered. A bank delaying transferring a property out of the owner's name makes the bank avoid responsibility for HOA fees,TAXES, INSURANCE, etc.

      I typed-up my own QCD to transfer the property out of my name into the bank's name, and recorded it with the county Deed and Recording Dept. If you do the same, you will no longer own the property. Be sure to send the HOA a copy of the stamped, recorded QCD so they can pursue the bank to pay the fees.
      0 Votes

  • CD
    Jan, 2013
    Cindy
    We started a short sale voluntarily. Because of health problems, I was going to look for a lower paying job because my current one is very stressful. I have already been offered another job with almost the same pay but no stress. Can I stop the Short Sale process and keep our home?
    0 Votes

    • BA
      Jan, 2013
      Bill
      Cindy, I don't have enough facts to say whether you can stop the short sale process and keep your home or not. If you've been making your mortgage payments as agreed, then you can stop the short sale process, continue making your payment, and stay in your home. If you are behind on your payments, you need to catch up on your arrears or work out a solution with your lender.
      0 Votes

  • JN
    Oct, 2012
    James
    Thank you for posting this information. I am understanding more and more the importance of great vacation homes. The modular homes are what we all need to stay comfortable in this day and age. Keep up the great posts.
    0 Votes

  • JH
    Sep, 2012
    James
    My wife and I refinanced our home back in 2005 and then modified it in 2008 only to be reduced $100.00 still to high. In 2007 I went through a short time of unemployment and stuggling. We bounce back for a short time and then we were hit one set back after another, two deaths in the family within 6 months and major vehicle repairs on our 2 vehicles ( No vehicles, No work ). We are five months behind and have tried everything to get relief from our Mortgage Company ( NACA , HAMP , REPAYMENT PLAN, MODIFICATION ,RESTRUCTURE ,SHORT SALE ,DEED IN LIEU FORECLOSURE ) and we are upside down. Our Mortgage Company is not willing to help and has started forclosure process. Would Voluntarily Surrendering Help to beneficial ? ANY ADVICE ?
    0 Votes

    • BA
      Sep, 2012
      Bill
      A voluntary surrender could help you, but it could also leave you on the hook for any deficiency balance that remains after the house is sold at auction. You could look into a bankruptcy, as a way of discharging the deficiency balance. You will have to continue making the mortgage payment, if you want to stay in the housw.
      I don't know if you have other debts that you would clear out in BK, giving you greater cash-flow to afford the mortgage payment.
      0 Votes

  • JG
    May, 2012
    Joe
    Since January 2012 we trying to sell our house and so far not one showing or offer. We are moving to Europe and can not afford to keep the house here and renting in Europe a place. Our salary here is low and the future salary is low-medium. We thought through different options, including to rent out our house. But what I mentioned before. We can not keep both. To give back the house would be right now the only option. While a ruined credit score would be for us the least problem right now. Any advice?
    0 Votes

    • BA
      May, 2012
      Bill
      I see three options for you:
      • Start discussions with your home loan servicer about a a deed-in-lieu-of-foreclosure or a short sale. Both take you to the same place — selling your property — but via different routes.
      • If discussions with your servicer go nowhere, consider a strategic default. This is your nuclear option, as it were, if your discussions with the servicer fail. Before you pull the trigger and allow a strategic default, consult with a lawyer in your state who has experience litigating mortgage issues so that you have an understanding of your rights and liabilities for the deficiency balance.
      • Rent the property, and cross your fingers the rental market in your area is tight enough for you to break-even or better on your monthly cash flow.

      One last thought: Study your state's anti-deficiency rules to understand what, if any, liability you may have for a deficiency balance on your home loan.

      0 Votes