Credit Report Articles

Consequences Of A Strategic Default On Your Mortgage

Foreclosure sign in front of home.

Homeownership has long been a cornerstone of the American dream, but recently more and more people have decided to walk away from that commitment. Nearly one quarter of U.S. mortgages, 11 million loans, are upside down: the home is worth less than the amount owed. Though home values have begun to rise again, economists still predict it could take more than a decade to get to where they once were. It’s for this reason that many folks feel they could be better off to simply force a foreclosure and cut their losses.

One real estate research firm, First American CoreLogic, found that people frequently begin to think that strategic default is a good idea when the property value is 25% less than the debt value. Many homeowners dealing with negative equity are considering this option even if the monthly payment is affordable, reports Northwestern University’s Kellogg School of Management. Nonetheless, while purposefully defaulting on your mortgage may be a straightforward business decision, it’s one with far-reaching consequences.

Your Credit Score Will Tank

It’s important to weigh the repercussions of allowing the bank to foreclose on your home. What are the pros and cons? Defaulting on your mortgage will certainly ruin your credit, a valuable asset arguable worth maintaining and protecting. Know that a default could knock as much as 100 points off your credit score. This negative information can stay on file for up to seven years, making it difficult to secure new loans, credit cards and competitive insurance premiums.

Face Legal Action

States have different rules regarding the actions lenders may take against those who strategically default, but in some places lenders can sue in attempt to recoup their losses. This is what’s called a deficiency judgment, and these public records appear on your credit report. Not only does that cause your credit score to fall, but it effectively forces you to pay for a home you no longer have.

Bankruptcy

After the foreclosure, some homeowners choose to file bankruptcy to wipe off the deficiency judgment.

Homeowners who are considering strategic default should exhaust all options and speak with a CPA or attorney, as there are clearly a number of unpredictable issues. Speaking to a professional about your options may also help you protect your credit score while navigating these complex processes.