Strategically Defaulting on Mortgage Carries Heavy Consequences

Millions of Americans currently carry negative equity in their homes, meaning their outstanding mortgage balance exceeds the value of their property. Underwater mortgages are not only costly, but frustrating to borrowers who see homeownership as a retirement planning tool and a sound asset. Further, many find that even though they are financially able to meet their mortgage payments each month and have good credit scores, they do not qualify for federal refinancing programs. In response, a small percentage of homeowners have simply walked away from their homes in what is known as a strategic default.

This action has become more accepted among many homeowners, and 32 percent – or 68 million – believe individuals should be permitted to strategically default on their mortgages without any consequences, according to an ID Analytics survey. In addition, 13 percent – or 28 million – said they would likely strategically default on a mortgage, and 17 percent – 36 million – know an individual who has taken this course of action.

Voluntarily ceasing to pay lenders, and allowing the bank to foreclose on a home, may free up more income, but it comes at a price. A foreclosure can have damaging consequences for a consumer’s credit score. Many people who walk away from their homes have good credit scores, and negative information on their credit report tends to affect their scores more adversely than people with already-low credit ratings. The survey revealed that in this new economic climate, 36 percent – 77 million – of Americans believe it is socially acceptable to have a low credit score. However, this may make it more difficult to qualify for another mortgage, rent an apartment or secure a new job. Further, some lenders only extend recourse loans, meaning that borrowers who lose their homes to foreclosure are still held personally liable for the outstanding balance.

Exploring other options

Homeowners who are underwater on their home loans can benefit from speaking to a credit counselor or enrolling in housing counseling to explore their options. Some may qualify for the new terms under the federal Home Affordable Refinance Program, which allows underwater borrowers who meet certain stipulations to refinance their loans. Individuals who are burdened by their monthly payment may also discuss budgeting techniques with professionals to help them save money until the housing market reaches sustainable levels of recovery.