Regardless of whether or not they can sustain the required payments, more and more homeowners are taking to walking away from their mortgage responsibilities. This is in the face of an increasing number of people falling into foreclosure after succumbing to the ‘underwater’ phenomenon whereby the value of a house falls far below the amount owed for it. The act of walking away from an underwater mortgage is often referred to as strategic default.
Making such a decision may seem to be a rational decision for the individual but this does not come without consequences, and major ones at that. A strategic default may not be the most advisable action for a person who is in a position to make the required monthly remittances but is impatient to wait a decade until the housing market takes a turn for the better.
The Consequences of Abandoning an Underwater Mortgage are as Follows:
1Facing the Deficiency Judgment
Persons who opt for a strategic default place themselves in a position whereby their lenders may opt to file deficiency judgment lawsuits against them. Such a lawsuit is aimed at helping lenders recoup their losses and as such may involve them demanding payment for the unpaid balance, i.e., what remains between the sum you owe (including the cost of foreclosure) and the home’s fair market value.
It is not always that lenders will pursue persons who have underwater mortgages but this does happen in some states. In some cases, affected homeowners have opted to file for bankruptcy to eliminate the deficiency judgment. Such a measure may be unnecessary in some states as these curtail such lender action through non-deficiency laws. In these states, lenders may still pursue you for a second mortgage and may file a deficiency judgment lawsuit against you in the event that you had settled the original underwater mortgage.
2Negative Consequences for One's Credit Score
A person with an underwater mortgage may choose to take a strategic default and manage to escape the deficiency judgment. He/she may however not be able to escape a negative drag on their credit score, an asset that really calls for astute maintenance and protection. It is this score that has a bearing on almost everything including getting new credit, the interest rates for the same, and even your chances of securing a new job. It is however possible to blunt the negative impact that the strategic default may have on your scores by always trying to settle all your other bills in a timely manner.
3About State Taxes
Homeowners with underwater mortgages who are on the verge of taking a strategic default are well-advised to seek professional opinion lest their action present them with unanticipated state tax obligations. A good illustration of this is the homeowners’ federal tax relief issue in California.
Prior to plunging into a strategic default decision all the other available options must be considered. These include mortgage renegotiation and even the HAMP (Home Affordable Modification Program).
4Moral Implications
Opting to walk away from an underwater mortgage traditionally served to cast a person as a reckless character. This opinion was more so for persons who defaulted willingly when they were fully capable of settling their mortgages. In the modern day, and with the wanting state of the housing market, the moral implications of strategic defaulting seem to be taking a backburner position to the more practical consequences of the same decision.
The Benefit of a Strategic Default:
5It is Said to Make More Financial Sense
The act of walking away from an underwater mortgage via a strategic default has been identified as being financially more prudent since one is prone to losing more money in trying to settle the mortgage than if he/she abandons the same. This sentiment is supported by the observation that a good credit rating, 660 and above, can be restored within two years of a strategic default decision. More opinions on this are offered via consumerist.com.
Options for People with Underwater Mortgages:
- Continue occupying the property.
In the event that your property can still be occupied as a shelter and that you can handle the expenses for doing so there is no reason why you can’t continue living there – this is as long as you can consider the underwater mortgage issue to be purely arithmetic. There are pros and cons to this decision as offered here: www.wisebread.com.
- Rent out the property.
This can be a viable alternative if the proceeds you get in rent are capable of covering the ownership expenses. This will allow you to move into a cheaper property. Sometimes it may not be necessary to move out entirely, especially if you have a spacious property – renting out a room or two may be adequate. This way you will have some reprieve unlike a situation where the property is entirely lost to foreclosure.
- Consider a short sale.
Here the bank will permit you to sell the house at an amount less than the due balance on the underwater mortgage. While the bank may offer to accept this sales price and cancel the debt, it is possible that you may be expected to settle the balance partially or entirely. Legal advice is of the essence here as issues to do with the IRS will have to be tackled in the event that the bank wipes out part of or the entire debt.
- Attempt to renegotiate your mortgage.
You and the lender may agree to renegotiate the stipulations of your mortgage agreement including the interest rate, number of payments and sometimes the due balance.
