Is defaulting from your mortgage in westchester county really your best option?

Miami, FL- Many homeowners, when presented with an underwater mortgage situation, decide to walk away from their mortgage, but is this really their best option?

Underwater mortgages are those where the homeowner owes more on the mortgage than the home’s current value. When a homeowner walks away from their debt, they are turning to "strategic defaults". Although this may be attractive to some, financial experts warn that the cost of skipping out on mortgage debt can be really high. Therefore, a homeowner must be aware of the risks and complications he or she is entering into when he or she walks away from a mortgage.

The American Bankers Association recently warned homeowners about the consequences of strategic default, including the possibility of the bank obtaining a judgment to pursue the homeowner’s assets, such as bank accounts, cars and investments.

Among the areas affected through a mortgage default are: A negative impact on Credit score, difficulty getting a new mortgage, and in some cases tax liability.

"A foreclosure is one of the stronger predictors of future credit risk," says Craig Watts, public affairs director of FICO. Unfortunately, foreclosures stay on a credit report for 7 years. The score can begin to recover gradually but it does take time. The situation is improved a little if the consumer stays current on all other payments on other credit accounts, explains Watts.

Watts says the impact of a foreclosure on a credit score depends on other factors in the borrower’s credit history. The ABA says a foreclosure drops a FICO score by 100 to 400 points.

Furthermore, getting a new mortgage can be a challenge for those who decide to go through the defaulting process. Peter Fredman, a Berkeley, Calif., consumer attorney, says Fannie Mae and Freddie Mac will not approve a mortgage within four years after foreclosure, while the ABA says it can take three to seven years to qualify for a new mortgage.

And finally, some cases can be affected by tax liability as state taxes still may be due on unpaid debt.

There is definitely enough factors that can make a homeowner think twice before defaulting on a mortgage, however, the situation is different in every state, and some states are more risky than others.

"The first question for anyone considering a strategic default is whether the homeowners will be liable for the debt anyway," says Fredman "Each state has different rules."
Michele Lerner, from foxbusinessnews.com explains that “non-recourse laws protect homeowners in some states. When a borrower defaults in one of these states, the lender can take the home through a foreclosure but has no right to any other borrower assets. (Home equity loans are not eligible for this protection unless they were used as part of the home purchase.)

 

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