When It’s Time to Walk Away From Your Home
Is It Really Time to Let Go?
In some real estate markets, housing values have recovered quite nicely since the housing crisis first struck fear into the hearts of homeowners everywhere. But other markets haven’t bounced back so quickly. There are still plenty of homeowners who are underwater, owing more on their mortgages than their homes are currently worth.
Nobody goes into the home buying process with the intention of defaulting on the mortgage. After all, owning your own home is a big part of the American Dream. But for some homeowners, there comes a time when continuing to make the payments on a losing investment starts to seem pretty futile.
If you find yourself in this position, you might begin to wonder whether you’d be better off simply walking away from your mortgage.
“Walking away,” or strategic default, as its known in the real estate business, is the act of voluntarily defaulting on a mortgage. Should you walk away from your home? And if you do, what types of consequences can you expect?
20,000 Leagues Under the Sea
Underwater mortgages are the main reason why some homeowners choose to walk away from their homes. Here’s the scenario.
Let’s say you purchased a home back in 2006 for $400,000. Given the market conditions at the time, it seemed like a wise investment that was sure to grow in value over time, and as an added bonus, it would provide shelter for the people you care about.
On the latter count, it delivered, but on the former… not so much. Fast-forward to 2015, and your house is currently valued at around $240,000, yet you’re still paying off the initial loan amount. You owe more than $340,00 on a home that, if you sold it today, would leave you $100k in the hole.
It’s a painful state of affairs, but it’s one that’s all too familiar for some homeowners.
Alternatives to Strategic Foreclosure
Before walking away from your mortgage, you may want to attempt to ameliorate the situation by exploring alternatives.
You may be able to find relief in the form of a short sale, a deed in lieu of foreclosure arrangement, or a HARP or FHA Short Refinance. You may also be able to negotiate with your lender for loan modification.
The Last Straw: Strategic Foreclosure
If you’ve already tried alternatives, and haven’t been able to come up with a satisfactory resolution, then some experts recommend strategic foreclosure as an exit strategy.
How does strategic foreclosure work? Well, you simply stop making your mortgage payments, even if you can afford to do so, because it doesn’t make financial sense to “throw good money after bad,” so to speak.
Consequences of Walking Away From a Mortgage
Strategic foreclosure can cause conflicting feelings. Some homeowners feel morally wrong about defaulting on a debt they’ve previously committed to paying. Others evaluate the decision from a purely “business” standpoint. Of course, there are also the emotions associated with losing the home that you’ve worked so hard to purchase.
In the end, many who “walk away” feel a great sense of relief. Still, defaulting on a mortgage is not without consequences, even if it is done voluntarily.
In some states, the lender can pursue a deficiency judgment against the borrower. Lenders sell foreclosed homes to make up the remaining debt, but in the case of an underwater home, the sales price is unlikely to cover their losses. Deficiency judgments make the former borrower responsible for repaying the shortfall.
Some states allow for deficiency judgments, while others do not, so it’s important to research the laws in your state before going into strategic default.
As you’ve probably guessed, walking away from your mortgage can do a number on your credit rating. Expect to lose 100 points or more, and don’t plan on applying for another mortgage for 3-7 years. Some strategic defaulters take out a mortgage on a less expensive home and acquire high-limit lines of credit before ceasing payments in order to prepare for the credit drought to come.
Walking Away From Your Mortgage Is a Big Decision
Strategic default may provide some financial relief, but as you can see, it’s not a decision to take lightly. Hopefully, you never find yourself in a position where walking away from a mortgage is a necessity, but if you do, you’ll be prepared.