"Can I afford this mortgage?" is a question that only you can answer. But I think it's probably worth outlining the questions you should ask yourself before you decide to default on your mortgage:
1. Have I made a good faith effort to cut my expenses? Have I cut out cable, sold vehicles or boats, cut down on bills, stopped unnecessary expenses or cut down on vacations?
2. Have I made a good faith effort to ramp up my income? Have I looked for freelance work, part time jobs? Have I considered a roommate if that works in my situation?
3. Is the mortgage cutting into necessary savings? After I have worked on the income and expense side, can I pay the mortgage while still saving:
- 15% of my income for retirement
- An adequate sum for college if I have kids
- An emergency fund of at least 6 months worth of expenses
- Any savings for special needs or upcoming medical expenses
4. Would keeping the house endanger my family's health or education? If your two-story house is too far underwater to sell, you don't have spare cash to put toward the mortgage while you rent it out, and a loved one is in the hospital; default on the house if you don't have enough savings to make up the equity shortfall.
5. How likely is this circumstance to change? If you just lost your job which was necessary to pay the mortgage, immediate strategic default should be held off. But if it's been nine months and the mortgage is eating up your savings, it's time. If your income situation is likely to be long term then there's no sense putting off the inevitable. Stop paying your mortgage and start talking about a short sale, start talking to a personal bankruptcy lawyer, and get credit counseling.
If you think you'll make more money later, what is right and what is sensible is to take an extra job for a while to cover the mortgage.
6. Is the bank going to come after me for the deficit? If the deficit is smaller than your emergency fund, consider using the emergency fund to sell the house and make up the deficit. You will be better off saving the emergency fund again than you will be destroying your credit.
If the deficit greatly exceeds your assets (other than retirement which creditors can't touch), then do a short sale, a deed-in-lieu, or go through a forecloser. If the lender won't negotiate down to something you can pay, talk to a bankruptcy attorney.
Contact Black and Buono, real estate lawyers who can assist you in your short sale transaction and bankruptcy lawyers who can help you with a personal bankruptcy filing or credit counseling.
Excerpts – The Atlantic