There has been a lot of talk about short sales and loan modifications on various news channels, and in conversations with real estate agents, and those in the industry. But, what about the people who are dissatified with the value of their home and don't qualify for a short sale or modification?
With no solution in sight many homeowners dealing with underwater mortgages who can still afford to pay their mortgages are simply walking away from their mortgage, even when they can afford the payments.
The idea is known as a strategic default and the prospect of simply walking away has increased across the nation. In the past, lenders traditionally looked at the degree of a home's value depreciation to identify the risk of strategic default. But FICO Labs research now shows that these borrowers are only twice as likely to default as those whose home has managed to keep most of it's value.
In fact, true strategic defaulters are found to be savvy investors. They have higher credit scores, and fewer instances of going over credit card limits. The findings show a vast difference from their counterparts. There is even a rise of notable celebrities walking away from their mortgages.
The reality remains, however, that the ramifications of of simply walking away can haunt a homebuyer for years to come. "Walking away is a very serious matter," says Glamis Haro, a lending manager at Union Settlement, a credit union in New York City. "Just one late report on your mortgage can seriously damage you."
"In the past," Haro says, "a 30-day late payment on a home loan could result in 30 to 40 points being deducted from your credit score. But in today's unforgiving credit market, one late payment can now result in up to 100 points being deducted. And lest homeowners think they can take the heat, a late payment stays on the record for 7 long years. After 120 days of no payment, the delinquent homeowner enters what Haro calls "five fives" status – the notation (5-5-5-5-5) made on a borrower's credit report when they've gone beyond the point of no return. "You're considered unbankable," she says. "It could take years of working with a financial adviser to get back into lenders' good graces," she adds.
While there are some experts who claim that walking away is actually beneficial in the long run for struggling homebuyers, the risks often far outnumber the benefits. "A public record, such as a bank judgment or collections account, will affect a borrower's credit for 10 years from the last date of payment -- and any judgment is enforceable for up to 20 years," Haro says.
Karen Metoyer, a housing and credit counselor at Clearpoint, recommends that you work with a HUD-certified housing counselor, if your house is underwater, rather than try to work on a modification or refinance on your own. She says, "having a third party negotiate the modification or refinance helps give your financial situation credibility, because the banks tend to act more quickly in that case." These free counselors will also suggest if perhaps a reverse mortgage, refinance, or modification is your best option.
To find a HUD-certified housing counselor click here: http://portal.hud.gov/hudportal/HUD?src=/i_want_to/talk_to_a_housing_counselor
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