Five Things You Need to Think About Before Walking Away From Your Mortgage

Published by julia | Filed under Buyer / Seller Tips, Market Trends, Miscellaneous, Pinellas County Homes, Real Estate

More than one million homeowners have walked away from their mortgage loans over the past year, based on estimates. These strategic defaulters argued there is no sense paying for homes that have become worthless. A University of Arizona professor also advised underwater borrowers to walk away if their negative equity has surpassed 25 percent.

If you are considering walking away, think about these things first:

1. Credit Score
Whether strategic or not, a foreclosure will stay on your credit report for seven years. If your score is 780, it can go down by as much as 300 to 400, according to a FICO analyst. Your score will affect your insurance premiums, your application for employment and your ability to obtain other loans like car loans.

2. Recourse states
Check if you obtained your home loan in a recourse state – where your bank can pursue you to collect the difference between your loan balance and the sales proceeds from your foreclosed home. There are more recourse states than non-recourse states.

Large states like Florida, California and Texas are non-recourse – meaning they cannot collect the deficiency from you. But check again with a local lawyer because even in non-recourse states, there could be laws that enable lenders to pursue borrowers for payment after foreclosure.

In California, lenders can collect the balance on refinanced loans. For example, if the outstanding balance on your refinanced mortgage that was foreclosed was $200,000, and the bank sold the foreclosed house for $160,000, you could be obliged to pay the difference of $40,000, in addition to legal fees.

Also, most home equity loans or secondary loans are recourse loans in many states. Even if your state is non-recourse, the lender can still collect the deficiency in these types of loans.

3. Financial Sense
Will you save money if you walk away? If you can find a comparable rental house in a location you like and where the rent is much cheaper than your monthly loan payment, you can probably save for a huge down payment on your next house after seven years.

But if your negative equity has not exceeded 25 percent, and there are clear signs that home prices will rise again in your area in a few years, you might consider deferring your decision.

4. Tax implications
Forgiven debt arising from foreclosure is not taxable, but it is if the property is a second home or an investment home. Also, the law protecting debtors from forgiven debt taxation expires in 2012. Ask your accountant about the 1099 IRS form because you might need to file it.

5.    Guilt
Lastly, can you sleep at night knowing you stopped paying your loan even if you can afford to pay it? Will it bother you if your colleagues and friends come to know of your foreclosure?

Arizona professor Brent White said that weighing a mortgage decision should be rational. Nevertheless, emotions and moral values oftentimes come into the equation. So weigh things thoroughly before you walk away.

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