Can't Afford Your Mortgage, or Just Dying to Move? What Are Your Options?

If you've recently gone through layoffs at work, have recently inherited a relative's land contract, or find yourself in another housing situation that doesn't lend itself well to a traditional real-estate sale, you may be wondering whether you'll be stuck with this property forever—or worse, fall behind on any mortgage or contract payments and go through the foreclosure process. Fortunately, there are some ways to get rid of your outstanding mortgage (and home) and start over free and clear. Read on to learn more about your options if you'd like to exit your home as quickly as possible without harming your credit.

What choices do you have when traditional sale isn't an option? 

For those who owe about the same amount on their home as it's worth or have some equity but also some associated liens, a land contract, or other non-traditional circumstances that make sale through a real-estate agent difficult, selling your note on the private market may be the best way to quickly get cash for your next home. Alternatively, you can downsize or even rent an apartment and use the excess funds to pay off bills or make necessary purchases. 

A note-buying company can pose some advantages over going the traditional sale route. These companies generally pay all closing costs, ensuring that the quote you get is the final amount you receive. This helps you plan for these funds and even enter into a purchase contract for your next house as soon as you're given a price for your mortgage. Because you're selling your home to a note-buying company rather than an individual buyer (or family), you'll also avoid having to perform many of the repairs and renovations that are often needed to draw in buyers looking for curb appeal.

If you don't have enough equity in your home to receive a cash payout—or if you owe more on your home than it's worth—you may want to pursue a short sale or deed in lieu of foreclosure. These options are best if you can no longer afford your mortgage or if your home needs extensive repairs that aren't covered by your homeowner's insurance policy.

A deed in lieu of foreclosure is sometimes referred to as "cash for keys." In exchange for title to your home, the mortgage company will waive any deficiency balance and sometimes even provide you with a small stipend to help with moving costs. This process won't require you to list or sell your property to a third-party buyer. Instead, you'll give title to your home directly back to the bank. A short sale is somewhat different in that you need to obtain permission from your bank prior to listing your home for less than you owe; you'll then list your home for a price agreed upon between you and your lender. If someone purchases your home for this price, you'll be able to walk away from the transaction free and clear without dragging any deficiency mortgage debt behind you.

Will these options affect your credit score? 

Selling your mortgage to a note-buying company shouldn't have any negative impact on your credit. In fact, if your mortgage has led to a high debt-to-income ratio, getting rid of it and taking on a smaller mortgage (or renting for a while) may actually improve your credit.

However, both a deed in lieu of foreclosure and short sale have the potential to damage your credit for a few years until you've rebuilt a history of timely payments. Because of this, it's important to negotiate shrewdly with your mortgage company to determine whether they can report the forgiven amount to the credit-reporting bureaus as a settlement rather than a charge-off or deed in lieu, as doing so could minimize the hit to your credit.