Strategic Default: The Cost of Walking Away from Your Mortgage

Homeowners who are considering defaulting on their mortgage need to carefully consider the pros and cons. They should also consider meeting with a lawyer who specializes in financial issues. As strategic defaults increase, more homeowners who feel overwhelmed by their mortgage situation are considering just walking away. Before a homeowner walks away from their mortgage debt, however, there are several important factors they need to consider. Homeowners need to make sure that the benefits of a strategic default far outweigh the costs.

The first thing a homeowner needs to do is to fully understand what a strategic default is. A strategic default is when a homeowner can afford to continue making payments but chooses not to do so. The most common reason that a homeowner chooses to stop making payments is because the loan amount is more than the value of the property. This occurs when the real estate market crashes and causes home values to plummet. When a homeowner owes more on their property than it is worth, the property is said to be underwater. A homeowner with a mortgage on a home that has lost a significant amount of value might pay back the loan for years and never recoup on their investment. Some homeowners choose to walk away from their property instead.

Secondly, homeowners considering a strategic default should familiarize themselves with the pertinent laws in their state. In some states, the homeowner effectively fulfills their end of the agreement by handing the keys of the mortgaged property back to the bank. The bank cannot force the homeowner to pay back the full amount of the loan if the property has dropped in value. In some states, however, the homeowner is responsible for the full amount of the loan. Even if they walk away from the house, the bank can still require them to pay. These states allow the banks to take legal actions against homeowners who attempt to strategically default on their home loans. For this reason, it is particularly important that any homeowner considering a strategic default carefully research the local laws.

Thirdly, homeowners should be prepared to live without credit for a while after they walk away from their mortgage. Financial experts estimate that it takes between three and five years for an individual who defaults on their mortgage to get a good credit score again. Homeowners who default on their mortgage need to make any upcoming major purchases before they stop making mortgage payments.

Finally, homeowners have to decide for themselves if they can ethically walk away from their debt. Many individuals feel shame if they are unable to pay back money that they owe. Others feel fine about doing this, stating that the bank does not seem to have any ethical concerns, so they do not see why they should either. This is an individual decision that homeowners must make themselves. Depending on a homeowner’s state of residence and personal beliefs about debt repayment, a strategic default might be a viable option.