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?