I speak from direct experience from the last downturn. Basic options I can see:
1) Sell the house for what you can. Take out a loan on the remainder and pay it off. This will result in your credit remianing at its current level. Had I to do it all over again (and if I decided not to be a landlord), I would take this option because it results in being able to freely manueuver when the next RE boom begins. A negative mark on your credit history could tie your hands if the lending practices tighten up (which is likely).
2) If you’re willing to accept a moderate or heavy hit to your credit (as SDR and others already described, so I won’t) then, consider these options:
a) Short sale
b) Foreclosure – just walk away and mail in the keys to your property. Minimum 7-year credit hit, potentially even longer.
3) Landlord – this is the long plan and eventually SHOULD pay off. The term for it to become a profitible resale or a desireable assett? Anyone’s guess. In my situation, had I held on to my property, rented it, and sold during the boom, I could have made a respectable profit. Being a landlord can be a real pain and not everyone is a good fit for that role. Tough choice.
In summary, I’d pick either 1 or 3 if I were you. The short sale is an attractive choice, but will have credit implications later and tax implications sooner. And, the lender may not allow it (mine didn’t, though I tried like heck!).
Good luck and please let us know the details of what you decide and how it transpires. Thanks for sharing your situation.
