Should You Walk Away From Your House?
“Should I just walk away from my house?”
I am asked that question more than I care to confess. So often, in fact – I now have a canned reply:
The decision to walk away from your house is a very personal one that I really can’t offer any advice on – but I will be happy to reply any questions about what you can expect to happen whether you do choose to just “walk away” from your house…
And after I don’t tell them “yes” or “no” as to what they should do, they nearly always have questions for me.
Strategic Defaults
It has become so common for someone who has previously perfect credit who currently has negative equity in their home to just walk away that someone, somewhere came up with the term strategic default. When a person decides to strategically default on their mortgage, it means that they can afford the monthly mortgage payment but for business reasons choose to just default on their loan.
And strategic defaults are becoming more and more common in areas where property values have went down dramatically.
According to the LATimes:
- Research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50% more likely to “strategically default” — abruptly and intentionally pull the plug and abandon the mortgage — compared with lower-scoring borrowers.
- Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. that is in stark contrast with most financially distressed borrowers, who try
to keep paying on their mortgage even after they’ve fallen behind on other accounts.- Two-thirds of strategic defaulters have only one mortgage — the one they’re walking away from on their primary homes. Individuals who have mortgages on multiple houses additionally have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes.
- Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, but they seem to look at it as a business decision: “Well, I’m $200,000 in the gap on my house, and yes, I’ll damage my credit,” he said of defaulters. But they see it as the most practical solution under the circumstances.
Whether there is a moral issue with strategic defaults or not is usually not something I ever bring up. I have found that each person has their own reply to that and I try not to tell someone what they should do when they ask me the question of “Should I walk away from my house?” considering in my opinion, it is a very individual decision.
But whether you are currently considering walking away from your house, be certain to speak with a Real Estate attorney who knows the laws in your state so that you don’t get caught in the “anti-deficiency” trap where your lender could come after you for any deficiency that a foreclosure may cause.
I can’t imagine anything being much worse than making a very fit decision like that only to find out that you didn’t have all the knowledge.
Orginal post by Justin McHood
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