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Consequences of a Strategic Default

In my daily job, I often have been part of a conversation where someone tells me they are considering walking away from their home and, in turn, walking away from the mortgage.  They often want to know what the consequences are.

With an estimated 11 million people underwater on their mortgage nationwide, (owing more on their mortgage than their home is worth), even the most credit-worthy consumers are considering walking away from their mortgage.

Strategic default (Walking away from a mortgage) typically ends with either a short sale or foreclosure and many people in this position are asking one simple question:

What are the consequences of walking away from a mortgage?

Well, I have the answer – or at least some of the answer as each situation is different. Typically speaking, if you are considering walking away from a mortgage the major consequences will include:

  • Damaged credit
  • Deficiency risks
  • Tax consequences
  • Moving costs
  • Professional implications

Damaged Credit

Most people are aware that strategic default will mean their credit score will take a hit. What many are not aware of is between short selling and foreclosure, there is very little difference in how much your credit score is impacted.  The main differentiator of the two – as it pertains to credit – is how soon you can qualify to buy a home again after the event has occurred, not how many points your credit score went down.

Beyond your credit score taking a hit, it is also common for credit card companies to cancel credit cards or lower your credit limit as a result of the negative items reported by another lender on your report.  It is also common that it will become more difficult to obtain financing for larger ticket items such as autos or furniture — or any other type of revolving account after walking away from a mortgage.

Deficiency Risks
Depending on which state you live in, there are varying deficiency risks associated with walking away from your mortgage. (For my Wisconsin readers, see this link for our anti-deficiency rules, for everyone else, click here for anti-deficiency laws by state).

Read this as: Your lender may sue you for the difference between what you owe and what your short sale or foreclosure proceeds were.

Anti-deficiency protection is limited to a minority of states and for most states in the U.S., there is no protection for homeowners from a lender pursuing the difference between what they owe and what the home sells for in foreclosure.

Further, even if your state has anti-deficiency laws in place, don’t think you are free from deficiency risk.  Whether you have deficiency risk or not, depends on factors such as: whether you have a second mortgage; did you refinance and take cash out; is your mortgage the one you got when you originally bought the house, and more.

If you are concerned that you may have deficiency risk, you should speak with a local real estate lawyer who can provide legal advice for your particular situation.  Only a real estate attorney can accurately provide you the specific advice for your situation. Don’t rely on your neighbor’s advice or your brother-in-law who just short-sold his house and recommends that you should be okay by just walking away.

Tax Consequences
If you are considering a strategic default on your primary residence, there is a chance that you may have some tax liability.  If you are considering the same for a second home or investment property, there can be a significant tax liability and you should consult your tax accountant before making any moves.

Moving Costs
One of the commonly under-estimated consequences of walking away from a mortgage is the expense and process of moving.  Some of the common concerns related to moving include:

  • Moing into a rental — perhaps after decades of being a homeowner.
  • Possibly explaining to the landlord any credit report concerns as a result of missed mortgage payments.
  • Paying for moving expenses. Utilities, deposits, moving trucks and other expenses can add up fast.
  • Moving family members school, work or community activities they have gotten used to.

Professional Implications
Depending on what you do for a living, you may have professional consequences as a result from walking away from a mortgage.  The number of professions where your credit profile matters has grown over the last decade and if you are in a situation where your credit profile matters, you should know what the professional implications are before you walk. After all, you certainly don’t want to lose your house and your job shortly thereafter.

Walking Away from a Mortgage: The Single Biggest Mistake You Can Make

When making the decision to walk away from a mortgage, the consequences are certainly something to consider as part of the decision process. Not considering the consequence can certainly be the single biggest mistake you can make.

If you have further questions, you are always welcome to call me; in the Milwaukee metro area, call me at 262-293-5144 or outside the area at 800-627-1925, option 1, extension 5144.

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