Walking Away From Your Mortgage 2010

That the economy is hard right now is no secret. People are unemployed. Those that are fortunate enough to still have their jobs are finding that they are working longer hours, often for lower pay. They are struggling to pay their bills, including the mortgage. Making this already bleak picture even worse, is the fact that for many people, they now owe more on their house than it is worth.

It has always been commonly accepted that your home was an asset. People bought their houses for the stability, the investment and the financial security that they offered. By purchasing a home, people had something to fall back on in hard times. They made sure the mortgage was always paid, before all other bills. People would forego paying other credit card bills, and even buying groceries, because the mortgage was sacrosanct. Nothing stopped them from making that payment. In turn, their homes could be refinanced, equity tapped into.

This current economic situation finds homeowners in very bad positions. Not only are they finding that there is no equity in their homes to utilize, they are finding that the homes are worth much less than what is owed. This situation prevents them from being able to refinance the homes to achieve a lower monthly payment. Simply put, they find themselves in the position of struggling to keep a house that is not worth the payments they are making.

This creates a paradigm shift in the mentality regarding house payments. Once thought to be the comfort and safety that they couldn’t live without, they are starting to believe that keeping the house will be impossible. Therefore, people who once sacrificed all other debts in favor of the mortgage are now doing the exact opposite. They are sacrificing the mortgage in favor of keeping up with car payments and credit card payments. What once was an embarrassment has almost become a badge of honor. People who once would have never admitted to defaulting on their mortgages now are almost proud to say that they were forced to walk away from a mortgage on a house that was valued at less than the note. They are looking at rentals around them and deciding that they can very happily live in a smaller home where they will pay less in rent than they are currently paying on their mortgage.

Interestingly, this phenomenon is even happening with people who can afford to continue meeting the mortgage. Even people who can pay the mortgage are making the same decisions. There is a belief that the market will never recover, that they will never recoup their monthly investments in the property. These people begin to view the monthly mortgage not as money well-spent to protect a valuable asset, but as money thrown away. They are also making the painful decision to walk away from their mortgage in 2010. Like people who are unemployed and can not make the mortgage, they are realizing that they can live quite happily in a rental that requires a lower monthly commitment.

However, there is hope for some families. The Federal Government has a strong desire to see homeowners stay in their houses, and out of foreclosure. They are offering financial incentives to mortgage holders to work with homeowners. They are encouraging mortgage companies to meet with homeowners who are in default to rework the mortgages and offer lower interest rates. These lower interest rates can mean the difference between being able to make the mortgage and keep the house, or being forced into default.
Anyone currently facing foreclosure who wants to keep their home should contact their bank for more information on mortgage assistance. With the incentives being offered, there may be hope that you won’t have to walk away from your mortgage in 2010.

Walking Away from Your Mortgage

If the value of your home is significantly less than the amount you still owe on your mortgage, you may be wondering if walking away from your mortgage is a viable option. Consumers today are increasingly receptive to the idea of abandoning their homes and defaulting on their mortgages to avoid remaining tied to a losing investment. In fact, nearly seventeen percent of participants in a recent survey stated that they would abandon a mortgage loan if the home’s value dropped to half of the mortgage balance.

Although walking away from a mortgage loan might appear "strategic," is it really a good idea? While consumers may think that abandoning a mortgage is the best choice for getting out of a failing investment, they often do not understand the sever consequence that come with making this decision.

A mortgage loan default will have a dramatic impact on your credit score. When your mortgage company reports the default to the three major credit bureaus, you can expect your credit score to drop by at least 100 points. If you have worked hard to maintain a good credit score, a "strategic default" will ruin the rewards of your diligent efforts. Even worse, the default will stay on your credit report for at least seven years.

It is important to understand that a mortgage default is viewed much more negatively than other types of credit items. A potential lender will likely overlook a few missed credit card payments, but will not likely forgive a mortgage default, even if your credit history is otherwise clean. Defaults on home mortgages typically carry about the same weight as bankruptcies in the eyes of credit lenders.
A "strategic default" will make it very difficult for you to obtain a car loan. If you find yourself needing a new vehicle after walking away from your mortgage, you will likely be stuck buying a car from a "buy here, pay here" dealership – these businesses usually charge very high interest rates, and are rather unforgiving when it comes to late payments. Purchasing from a "buy here, pay here" lot is a hassle that is best avoided if at all possible.

Walking away from your mortgage will also make obtaining an unsecured credit card challenging, if not impossible. If you need a credit card for traveling, online payments, or simply convenience, you may have to obtain a secured card. There are three significant drawbacks to secured cards: First, you can only spend the amount you have prepaid on the card; second, many secured card lenders charge high maintenance and transaction fees; and third, on-time payments are typically not reported to credit bureaus, so they won’t help raise your credit score.

Difficulty obtaining credit is not the only problem that comes with walking away from your mortgage. Buying a new home will be nearly impossible as long as the default remains on your credit record. Even if you plan to rent, keep in mind that most landlords and rental agencies check credit reports when evaluating prospective tenants. A mortgage default can keep you from securing a desirable apartment or rental home.

Even finding a job can be a difficult task after you have defaulted on a home mortgage. An increasing number of employers use credit reports to assess prospective employees. Although your current employer can’t fire you for walking away from your mortgage, a new employer can deny you a position, or retract a job offer, if the default is discovered.

For these reasons, a "strategic default" isn’t terribly strategic after all, especially if you have the financial means to make your mortgage payments. It will likely put you in a far worse position than if you simply wait for the housing market to recover before considering a move.

Options for walking away from Your Home Loan

With the value of your home decreasing and costs of everything else going up, it can be difficult to figure out how you are going to pay your loans.  While the Obama administration has helped some people, there are still millions who do not qualify due to the decrease in value their home.  Thoughts about how to pay your mortgage can be scary.

Years ago, giving up on a mortgate would have been unthinkable.  However, with economic bad news hitting us at every corner, that is exactly what some people are doing.  It never hurts to talk to your lender to see about other options first.

However, if there are no other options, you most likely won’t be subjected to any lawsuits.  The government should not tax you either.  Finally, although your credit will be damaged, it should be reparable. 

One option available to you is to try for a short sale.  Work with the lender to see if you can sale at a price lower than the mortgage amount.  Another option is a “deed in lieu” where you give the lender the deed to your home and in return the lender agrees not to start the process to foreclose on your home. 

You can simply threaten to stop paying on your loan.  The number of people who are hurting financially is overwhelming the banking industry, making it more palatable for a lender to determine a resolution which is mutually beneficial.  The cost to lenders can simply be too much to go after somebody who cannot afford to pay. 

Different states can have different rules regarding when lenders can go after borrowers for the balance due on their mortgage loans after foreclosure. 

A good rule of thumb is to discuss the laws of your particular state with a lawyer.  You can also include a lawyer in any short sale, deed in lieu, or the foreclosure to additionally protect yourself. 

Besides having a lender potentially pursue you, you also need to be careful of Uncle Sam. Forgiven debts can often be counted as taxable income.  If you must sell your home through a short sale or opt for the deed of lieu, take a look into using special tax form 1099-C.  Some states have passed laws that are similar to national laws, so check with an accountant.

The damage to your credit can last up to seven years, but the extent of the damage also depends on how you have been able to pay other lenders.  If you are looking to rent a property, you should easily be able to qualify as long as walking away from the mortgage was the only event damaging your credit. 

Due to the staggering number of people who have had their homes foreclosed, lending institutions have been working to remove the stigma that has been associated with home foreclosure.  Keep a cool head and an optimistic attitude and you can weather out the current economic storm.