Written by As of April, there were about 11 million people who are underwater on their mortgage, leaving many people thinking about walking away from their property, also known as a “strategic default.” When a home owner decides to do this, it will either result in a short sale or a foreclosure, the majority of the time. Either way, there are some negative repercussions that come along with this decision.
Probably the most obvious result of a strategic default will be the impairment of your credit score. While your FICO score can be hit with anywhere between 130-240 damage points (according to a release from FICO in 2009), most people do not realize that the number is based on your personal credit situation, and not whether or not you did a short sale or a foreclosure. The only real difference between these two is the amount of time it takes before you can get another mortgage. This also affects your ability to obtain financing for other purchases, such as a car. A late mortgage payment can also affect your standing with certain credit card companies.
Depending on the state that you live in, the lender may have the ability to sue you for what you owe, after subtracting the profit made from the short sale or trustee sale. In California, the lender can sue you for money owed on a second mortgage or a home equity line of credit, but not for a loan used to purchase a home. This, as well as certain tax liabilities, are reasons why you should do extreme due diligence before thinking about walking away from a loan.
Interestingly enough, walking away may have a negative professional impact on you, as well. The number of companies that require good standing credit has grown over the course of the last ten years. The last thing that you would want to do is say you committed to a strategic default, and then wind up losing your job based on the negative credit consequences, because there is never anything very strategic about losing your job for reasons you did not understand.
Sometimes, life throws curve balls at good people. While a short sale or a foreclosure may be inevitable, it is important to understand the consequences of such a decision. Being upside down on a property can be a scary thing, but most of the time does not require immediate action. My advice is to continue making your payments, even if you are upside down on the property. The best, most secure way to add equity to your home is to make the payment. Markets rise and fall. It is important to not make decisions based on what is happening at the moment, but rather hold strong to your long time financial goals.
