The Consequences of a Strategic Default
You may be considering a strategic default if you are one of the many Americans who owe more than your home is worth. Before walking away from your mortgage, find out the consequences before making the decision.
You could have considerable negative consequences if you can truly afford your mortgage but choose to default instead of throwing money into a devalued investment.
It's not as simple as one might think.
Strategic Default Consequences
- Not only does walking away from your mortgage damage your credit but the bank can seek judgment against you to seize other assets such as bank accounts, 401K accounts and cars.
- If you live in Alaska, Arizona, Iowa, Minnesota, North Carolina, North Dakota, Oregon, Washington, Wisconsin, California or Montana the bank can take your home through the foreclosure process but cannot pursue any other assets you may have.
- For most states in the US, you have no protection from the lender pursuing you or your assets to get the difference between what you owe on your mortgage and what the home sold for in foreclosure.
- If you aren't in a state with deficiency laws, consult a real estate attorney who can provide you with the necessary legal advice for your particular situation.
- Let's suppose you default on a mortgage with a $200,000 balance. The bank sold the home for $150,000. You could get a 1099 at the end of the year for $50,000 because it could be considered "forgiven debt" that you now owe taxes on.
- Tax Debts never go away, not even if you file bankruptcy.
Applying for another mortgage
- A foreclosure is a big indicator to a lender that you are a future credit risk.
- The foreclosure can stay on your credit report for up to seven years. If you stay current on all your payments, your FICO score can start to increase after a couple of years. This means it could take you five to seven years to qualify for a new mortgage forcing you to rent until your FICO score recovers.
- If you deliberately default on your mortgage without attempting to seek out other options, Fannie Mae adopted a tough new rule for you. You will be ineligible for a Fannie Mae backed mortgage for seven years after the foreclosure.
- Your credit score will take a big hit which could mean you can't get a car loan for the next 3 to 5 years.
- If you keep all other payments current, your credit score will gradually improve but the foreclosure is not removed from your credit for 7 years.
- Not only does your credit score take a hit, but a credit card company may decide to cancel your credit cards or lower your credit limit. Since you missed your mortgage payments, you've now become a high risk borrower.
- To sum it up, seek out legal advice before defaulting on your mortgage. If you are in a financial bind, try a loan modification or short sale first.
- If you can afford the mortgage payment but are tired of the tanking investment, a strategic default could be your worst nightmare if you don't seek legal guidance.
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