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Numerous articles were published and billions of lines were written since the subprime crisis. Millions of homeowners upside down on their homes, some even having mortgages for more than twice the value of their home.
Then, you compound the problem with the poor job market (June 2012 job report), and people are running into trouble. Maybe they are forced to cut back, or get laid off. Now, not only is income tight, but they have a huge mortgage they can’t pay. And they also can’t refinance their mortgage loans because they have no job and their house doesn’t appraise.
Sometimes the only option is to walk away from a bad mortgage, or what is known as a strategic default. This is when you choose to leave your home, rather than having it foreclosed upon without your consent. You usually purposely stop making payment, and save your money to move on. Here are things to consider when walking out of a bad mortgage.
Options before Walking Out
Right now, there are more options than ever before to help you stay in your home if you are underwater on your house, and can’t pay your mortgage. There are several federal programs, and banks are also becoming more willing to negotiate.
The first option is to see if you can qualify for a loan modification. Many lenders are now forgiving large chunks of principal – up to $50,000 or more, in order to help avoid the costs of default and allow you to stay in your home. You see, if you walk away, not only does the bank start losing the payments; they also have to pay to foreclose on the home and then the costs of reselling it. It can be in the bank’s best interest to help you.
If you can’t get a loan modification, you may be able to get the bank to help you by allowing a short sale. This is where the bank agrees to let you sell the house for less than you owe, and forgives you for the difference. Right now this is a good option, because historically the amount forgiven would have been taxed as income, but a Federal program forgives the taxes on proceeds from short sales.
Consequences of Doing It
It is important to remember that there are consequences for doing a short sale, or even walking away from your home. First, your credit score will be negatively impacted. Also, there could be tax implications from doing it. Some states are “recourse” states, meaning that your lender could still come after you for the balance due, even after the house is sold in foreclosure. Your only recourse in that situation would be bankruptcy.
The Logistics of Walking Away
If you’ve decided that walking away is the only option, you should stop paying your mortgage and start saving the money. That will help you move forward. You have two choices: you can wait until the bank actually forecloses, which can take up to 6 months or longer, or you can just give your lender back the keys. Many people choose the first option, because it gives them time to find other housing and move. However, the choice is yours when it comes down to it.
The Moral point
Walking away from mortgage loan without negotiating or refinancing or whatever be your other alternative should be the last option you try. Only when paying for food becomes difficult for your family should you consider walking out like that.
Strategic defaults are morally wrong and it’s sure a bad karma. It’s advisable to employ an attorney to negotiate with your lender in case of such extreme difficulty.
Readers, what do you say on walking out of a bad mortgage loan or under water home, would you consider doing it if situation arises?
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SB
I want to emphasize-wlking away should be a LAST RESORT as you stated. Too many people in todays world use that as the first option because it is “the easy way out”, but it is not. Walking away, giving up to foreclosure, or “deed in lieu” (handing over keys to bank) will all net the same result-credit ruined for a minimum of 10 years and they can come after you for the difference of what was owed and the auction price or resale price depending on the laws in the state.
If there is no way to keep the house, because of job loss, divorce, illness, whatever the hardship reason, the Short sale is the best option (if upside down on mortgage) A good short sale agent will be able to negotiate with the bank and keep them at bay until a buyer can be found for the property at a price all buyers can agree to. And the unpaid portion of the loan can be forgiven entirely in most cases-federal may forgive tax burden on the unpaid portion but there is a state involved also, so tax forgiveness must be given by both. A good SS realtor will explain all of this and get the job done properly, but I emphasize, make sure they are well versed in short sale transactions. In most cases, if the short sale is properly done and the family gets back on their feet, they could qualify to purchase another home within 3 years.
The HARP program initiated by the government to help people retain their homes has so far been a glaring failure. This progam was to allow for refinancing at lower rates and payments(Loan Modification) Of the MILLIONS that applied for loan mods on HARP about 3% got approved. Why? The process was very cumbersome and time consuming. So the Govt answer to the problem was HARP 2.0-he jury is still out on this one but initial numbers are not good.
When talking with banks about loan mods, they are supposed to show an effort to do the mod with the customer, but in the case of FHA or VA, why would they go out of teir way? The loans are Govt backed, so they will get their money from someone-the customer or the taxpayer.
My personal opinion concerning the entire housing market-and I started in Real Estate during the Carter Administration-Fannie and Freddie were not “to big to fail” as most officials touted. Any company tha makes stupid decisions should live with the consequences of those decisions. Take off the band-aid quick-deal with the short term pain and move on. But the bail-outs started under the Bush Administration and continued through the current administration are prolonging the agony. Again, this is just my opinion, so I am not trying to start a huge debate of the reason for the current recession/depression.
Bottom line is, people need to take more personal responsibility, prepare for emergency situations-like job loss, illness etc. Life happens, and living strictly paycheck to paycheck will insure disaster in an emergency situation.
Just my two-cents.
Steve
I fully agree short-sale is the way to go when in trouble. You come out clan a lot quicker.
Agreed. It should be the last option. The institutions are in horrible state already. Adding more damage will cause more trouble.
It’s their own wrong doing, isn’t it?
I find it shameful when people can afford to pay the mortgage decide not to simply because the house has fallen in value. If you can’t afford it, that’s one thing, but if you have the same job, with the same income, and the same payment, it sickens me when they decide to just hand over the keys. I think that for the time being, the values and such have stabilized in most areas, so you’re not seeing this as much as you were 18-36 months ago.
I know there are extreme cases where it would take years to recover, but in most cases, once values stabilize and start rising, continuing to pay will bring you that much closer to being back in the black. And even in areas where it looked hopeless (like many parts of Arizona), values are now rising just as quickly as they fell. While they’re still nowhere near their peak levels, few would have predicted double digit growth was possible back when things were still falling even a year or two ago.
Many people who make this decision are way too short sighted.
Financially it can male sense but ethically it is a grey area. The bank did take a risk and that is why they get a premium on the rates they charge consumers.
When you walk away from a mortgage, your credit score will drop. If you have a secure job, own a home with a decent mortgage loan or are happy renting, you may not need a mortgage loan for many years. But if you do plan on buying a home, it will be up to seven years before banks will lend to you, and you may be required to make a bigger down payment or pay higher interest rates.
I think enough has been said already through the comments. Even I don’t understand why people get into a mortgage facility and then just opt to run away from this liability. Anyways you have written the post well and it is quite informative too. Thanks a lot for sharing.
When you sign mortgage loan papers you are accepting responsibility to pay the loan amount in full. To walk away and expect taxpayers to pay a portion/all or your mortgage is irresponsible at best. To turn around and buy another property is beyond my understanding!
It’s truly great to know that there are a lot of options to consider before giving up on mortgage.
My husband and I paid almost $500k for a place that’s now worth about $200k. We put 20% down, bought what we could afford, but places around us are foreclosing left and right because the BANKS allowed others to buy places without money down and without income verification. Now all these places around us are turning into rentals and crime and vandalism is going up in the neighborhood, but we can’t sell and the bank won’t short sale due to no financial hardship. Don’t talk to me about doing the moral or ethical thing until you’re actually in the situation. It’s easy for people to say they have an obligation to pay the mortgage back, but my husband and I won’t be held hostage or made to feel bad for walking away. It’s a business decision.
Perhaps there are other options for you available, have you exhausted all that?
Thank you for sharing the article. It’s very useful. Hope to hear more from you.