What it means to “walk away” from an upside-down mortgage

Owing more on your mortgage than your house is worth may seem like a bad investment. But the alternative – choosing to default on your mortgage even if you can afford the monthly payments – will take a significant toll on your credit rating.

“Strategically defaulting – deciding to stop paying your mortgage regardless of your ability to actually carry the debt – will have a far-reaching, long-lasting impact on your ability to secure future credit,” says Maxine Sweet, vice president of public education for global information services company Experian, one of the three large credit reporting companies that receive and update consumer credit histories which are scored to help predict risk. “It’s by no means a move to be undertaken lightly.”

About 355,000 borrowers strategically defaulted in the first half of 2009, according to research conducted as part of the Experian-Oliver Wyman Market Intelligence Reports. Interestingly, Experian and Oliver Wyman found that the homeowners most likely to strategically default were also those with the highest credit scores.

While it may seem like a good move to simply stop paying and walk away from a bad investment, keep several factors in mind when you consider strategic default:

• It’s very final. Strategic default will lead to foreclosure by the lender. Foreclosure will negatively impact your credit report and scores. In fact, only bankruptcy will affect your scores more adversely than foreclosure.
• The default will remain on your credit report for seven years. Since credit scores are based on information in your credit report, the foreclosure will greatly impact your credit scores during those seven years. Securing other credit at reasonable terms and rates will be very difficult, if not impossible, during that time.  Even the best credit repair firms can’t erase this one.
• Potential lenders aren’t the only ones looking at credit reports these days. Insurers, employers and even cell phone companies are considering the creditworthiness of those who want to do business with them. By impacting your credit report, a strategic default may affect your ability to get a job, secure insurance and enter into important service contracts.
• No more loans for you. Fannie Mae, the government-controlled mortgage giant, announced on June 23 policy changes that will make you ineligible for a new Fannie-Mae-backed mortgage if you walk away from a current mortgage that you actually could afford to pay.  The ineligibility will last for seven years from the date of foreclosure.
• You may owe taxes. Finally, in some cases, the debt that foreclosure “erases” may be recorded as income, which means you will have to pay taxes on it.

“Strategic default may seem like ‘walking away’ from a bad debt, but it’s really anything but,” Sweet says. “While you will no longer have to pay the actual debt, you’ll almost certainly ‘pay’ in other ways, in the form of lowered credit scores and a drastically curtailed ability to secure future credit for the next seven years. Higher interest rates and unfavorable terms could end up costing you more in the long run than continuing to pay on an upside-down mortgage.”

What should you do if you cant pay your mortgage?

If you are having trouble and need help to pay your mortgage, you first need to contact your loan servicer. This is the company that you make your monthly payments to, not always the same place you got your mortgage home loan. Have your loan number and property address ready when you call, along with any other important documentation you may have. When you call, you will need to give them a brief explanation of your current circumstances, recent income documents (such as pay stubs; benefit statements from Social Security, Disability, Retirement, or Public Assistance and unemployment benefits), and bank statements and tax returns for past 2 years. If you are self-employed, have your tax returns or a year-to-date Profit and Loss statement available for reference.  To see all your options, read our article on What To Do If You Need Help To Pay Your Mortgage.

To learn more about credit management, credit repair, credit reports, credit scores and the factors that affect them, visit the Credit section of RateNerd.com, or find local credit repair companies at ConsumerCreditGuide.org.

– Article Courtesy of ARAcontent

Tagged as: bad credit, bank, Credit Bureau, credit history, credit repair, credit report, credit score, equifax, experian, Fannie Mae, FICO score, Foreclosure, Mortgage, poor credit, TransUnion Credit Bureau, Your Credit Sucks

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