September 24, 2012

Consequences of Walking Away From Your Mortgage

With so many people in trouble, even the social stigma of ditching your financial commitments isn’t as great as it once was.

Some financial experts (and not shady ones) are even suggesting that some homeowners walk away from their mortgages—an action called strategic default.

Before you even consider defaulting on your mortgage, though, you should think about the real long-term costs and whether or not they are worth it.

Here’s a rundown of the top three things to consider:

1) Credit Issues: You probably already knew this, but your Credit score is going to take a huge hit.
Sometimes, it can drop as much as 300-400 points. A bad Credit score can make it hard to get a job (some employers are taking Credit into consideration), a new apartment, and can make for much higher costs on a future mortgage. Also, it takes seven years for a foreclosure to disappear from your Credit check completely, which can mean a total freeze out by themortgage industry. In other words, forget about buying another house for seven years.

In many cases, Credit card companies will cancel your cards or lower your Credit limit as a result of missed mortgage payments

2) Deficiency Risks: in some states, the lender can sue you for the difference in the amount that was owed and the foreclosure or short sale amount. In other words, if you walk out on yourmortgage and the bank gets a fraction of the value of the house, they can sue you for the difference.

You can even be affected in some states that do not have Anti-Deficiency laws. In other words, always seek legal advice.

3) Rental Difficulties: While the point of walking away from your mortgage is likely to lower your monthly costs with a cheaper place, it might not be so easy to just drop everything and rent an apartment.

First of all, many landlords will not immediately want to rent to someone who has the red flag of not making mortgage payments on their Credit report. Plus, you have all of the expenses that come from moving and getting rid of your old stuff or storing it. Moving family members further away from school and work is another consideration.

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