The collapse of the housing market in 2007 put a number of Americans in a financial bind. Many of them owned homes with values well below the balance remaining on their mortgage. This means that some already cash-strapped homeowners were paying off a mortgage value at more than their homes' worth.
CoreLogic reported that at the end of the last quarter of 2010 that 11.1 million properties were underwater, an increase from 10.8 million in the previous three-month period. Rather than struggle trying to emerge from an underwater home, some consumers walked away from their payment obligations. This option, known as a strategic default, may continue to grow as more homeowners find themselves with negative equity.
Although a strategic default may be an enticing option to get rid of a burdensome mortgage, it's important to learn how this decision may impact your finances before leaving your home behind. Here are some points to take under serious consideration.
Good Credit Score No More
By not making their mortgage payments and allowing their lenders to foreclose on their homes, homeowners with a good credit score* risk losing as many as 150 points, according to a recent FICO credit score survey. Not only does a foreclosure severely damage a person's credit score, but the survey found that the person would have to practice pristine credit behavior for about seven years in order to get their score back to a level considered worthy of home ownership.
Homeowners contemplating a strategic default should check their state's rules regarding this action because, in some areas, the defaulter may still be obligated to pay his or her debt. Not only will their credit reports and scores be affected by the foreclosure mark, but they may also receive a deficiency judgment against them. A deficiency judgment recoups the difference between the amount the lender makes from selling the home and the total balance remaining on the mortgage.
Difficulty Securing Another Mortgage or Renting
Because of the rising number of strategic defaults during the past couple of years, mortgage-backers Fannie Mae and Freddie Mac have instituted rules governing this action. The new policy states that homeowners who walk away from mortgage payments that they can afford to make will have to wait a minimum of seven years before they are eligible to receive another mortgage from the two lenders. Their credit reports and scores may be so severely damaged by the negative marks that they will not pass a landlord's credit check. Inability to buy or rent a home can be problematic for consumers who don't have another place to live.
If you do decide that a strategic default is the best option for you, be sure to monitor your credit to help you stay aware of the impact you are making on it.