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  • Walking Away from Your Mortgage

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    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.

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    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.

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    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.

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    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.

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