4 dangers of walking away from your mortgage
Homeowners who skip out on their loans face a slew of consequences.
Some homeowners who are "underwater," or owe more on their mortgage than the home's current value, are turning to "strategic defaults" in which they simply walk away from mortgage debt. But financial experts warn the cost of skipping out on mortgage debt can be high.
The American Bankers Association recently informed homeowners about the consequences of strategic default, including the possibility of the bank obtaining a judgment to pursue the homeowner's assets, such as bank accounts, cars and investments.
Here are four dangers of which homeowners should be aware and more information on the strategic-default environment.
1. Wrecked credit
Regardless of whether a foreclosure is because of a strategic default or other circumstances, it damages a consumer's credit score.
"A foreclosure is one of the stronger predictors of future credit risk," says Craig Watts, public-affairs director of FICO, a credit-rating company.
Foreclosures remain on a credit report for as long as seven years, with the impact gradually lessening over time. Watts says FICO scores "generally begin to recover after a couple of years," assuming the consumer stays current on all payments and other credit accounts.
He says the impact of a foreclosure on a credit score depends on other factors in the borrower's credit history. The ABA says a foreclosure drops a FICO score by 100 to 400 points.
2. Difficulty getting new mortgage
"A foreclosure is one of the stronger predictors of future credit risk," says Craig Watts, public-affairs director of FICO, a credit-rating company.
Foreclosures remain on a credit report for as long as seven years, with the impact gradually lessening over time. Watts says FICO scores "generally begin to recover after a couple of years," assuming the consumer stays current on all payments and other credit accounts.
He says the impact of a foreclosure on a credit score depends on other factors in the borrower's credit history. The ABA says a foreclosure drops a FICO score by 100 to 400 points.
2. Difficulty getting new mortgage
A voluntary foreclosure also can affect a homeowner's ability to qualify for a new mortgage for years to come.
Peter Fredman, a Berkeley, Calif., consumer attorney, says Fannie Mae and Freddie Mac will not approve a mortgage for four years after foreclosure, while the ABA says it can take three to seven years to qualify for a new mortgage. In addition, Fannie Mae this past summer announced a tough new sanction on people who deliberately default on their mortgages. These borrowers will be ineligible for a new Fannie-backed mortgage for seven years after the foreclosure date.
Peter Fredman, a Berkeley, Calif., consumer attorney, says Fannie Mae and Freddie Mac will not approve a mortgage for four years after foreclosure, while the ABA says it can take three to seven years to qualify for a new mortgage. In addition, Fannie Mae this past summer announced a tough new sanction on people who deliberately default on their mortgages. These borrowers will be ineligible for a new Fannie-backed mortgage for seven years after the foreclosure date.
3. Taxes still due
Tax liability is another potential danger of defaulting.
Although the Mortgage Forgiveness Debt Relief Act of 2007 offers protection from federal taxes after a foreclosure through 2012, state taxes still may be due on unpaid debt.
Although the Mortgage Forgiveness Debt Relief Act of 2007 offers protection from federal taxes after a foreclosure through 2012, state taxes still may be due on unpaid debt.
4. Deficiency judgment
A lender can also pursue the remaining debt from an unpaid loan by obtaining a deficiency judgment against the delinquent borrower, or it may work with a collection agency to recoup losses.
