Should You Consider Walking Away From Your Mortgage?

Many homeowners are still dealing with the burden of underwater mortgages, meaning that the mortgage on the property exceeds the home's current value. According to financial information provider CoreLogic, nearly 11 million homes are underwater. Homeowners that are underwater may consider a number of options, including simply walking away from their mortgage, also known as "strategic default."

Options for Underwater Homeowners

A first option those underwater may consider is refinancing their mortgage. However, homeowners can face a number of obstacles to qualify for refinancing, including meeting income and credit score requirements, and potentially having to put more money down.

Homeowners may also try to pursue a short sale, obtain a loan modification or seek assistance from various government programs targeted at distressed homeowners. Although these options work well for some homeowners' situations, they can also be difficult to qualify for and may require your bank's approval.

Choosing a Strategic Default

Underwater homeowners, frustrated with the prospect of continually paying on a mortgage that is worth more than their home and thinking it may be decades before their home regains its value, may then resort to walking away from their home altogether. In such a strategic default, homeowners intentionally stop paying their mortgage, and make the determination that being foreclosed upon by the bank is actually in their financial best interests.

Those considering strategic default may wrestle with the decision, feeling that they are somehow ethically obligated to continue to make payments to the bank. However, most financial experts liken a strategic default it to a business decision, since corporations commonly default on their obligations or breach contracts when it makes financial sense to do so.

A strategic default is not always the best option, however, sometimes homeowners would be better off filing for bankruptcy or taking some other action.

Consequences of Walking Away

The immediate penalty of a strategic default revolves around your credit rating. Walking away could reduce your FICO score by 85-160 points depending on where it stands currently. For a few years, qualifying for a mortgage or a car loan could be extremely difficult. But as your payment history improves, lenders will give you more opportunities. However, you'll experience higher interest rates due to your past default.

There are also a number of legal and financial implications to consider. For instance, you may be liable for a deficiency judgment depending on how much your former home sells for at foreclosure. Also, any debt that is forgiven may be viewed as taxable income, if the Mortgage Forgiveness Debt Relief Act does not apply to your situation.

The preceding is not intended to be legal advice. Before initiating a strategic default, consult an experienced bankruptcy attorney to learn about your rights and options.