The housing bust has left millions of homeowners with upside-down mortgages – that is, they’re paying for homes that are worth less than the balance due on the mortgage. It’s a disheartening situation that makes homeowners wonder if it’s even worth it to continue paying the mortgage. It’s like paying $1.50 for something that’s only worth $1.00.
The New York Times estimates that by June 2010, 10% of American homeowners with mortgages will have a home that’s worth less than the mortgage value. Some of you in this situation might wonder if it’s wiser just to walk away and if you decide to walk away, what’s going to happen to your credit?
Ditching a mortgage isn’t always an unavoidable choice made by people who simply can’t afford their mortgages. For some, it’s a strategic choice. Why pay a $2,000 mortgage, for example, when you could rent a place that’s nicer for half the price? And so you walk away. You hand the keys to the lender and move into an apartment. That’s the ideal situation, but the ending is not always that happy.
Give the lender back the keys
If your lender agrees to accept the home back and cancel your mortgage, you’ve just negotiated a deed-in-lieu of foreclosure. You avoid foreclosure proceedings (or stop foreclosure if it’s already in progress) and you also avoid a foreclosure listing on your credit report. Any payments you’ve missed will still be reflected as past due.
Your credit won’t go unscathed if your lender agrees to a deed-in-lieu of foreclosure. In fact, your credit score will likely drop by as many points as it would if you actually went through foreclosure, which could be 200 to 300 points depending on where your credit stands at the time you turn your keys in. Fortunately, you can typically recover quicker and get a new mortgage in less time than if you went through a foreclosure.
Turn your back and walk away
Your other option is to stop making payments and let your home go through the foreclosure process. It can take six months or longer depending on your lender and your state laws. In the meantime, your lender will continue collection efforts, which may mean phone calls and letters. Of course, foreclosure will hurt your credit score, sometimes by as much as 300 points and will impact your ability to get credit cards and loans in the future.
How credit card issuers may respond
Your credit card issuers may take action when you walk away from your mortgage. After February 22, a new credit card law will prevent them from raising your interest rate simply because you ditched your mortgage. However, they can still lower your credit limit or cancel your credit card completely if they see you as a credit risk.
Renting after walking away
If you decide to walk away from your mortgage, I suggest finding a new apartment first since landlords also check credit. Once your credit report shows that you chose not to pay your mortgage, you could have a hard time getting approved for an apartment. Some landlords have been more lenient since the credit crisis began, but it’s not guaranteed that a landlord will accept your application with such a serious negative mark on your credit report.