Should I walk away from my home If I’m upside down on my mortgage?
Should you strategically default on your upside down mortgage and do a short sale if you owe more on your mortgage balance than your home is worth? This is a highly personal decision for each individual. There are credit consequences, certainly, but probably not the long term dire consequences you might have imagined.. Following are several comments and excerpts from Nick Timiraos of the Wall Street Journal; R
eal Estate Short Sale Specialist, Tim Harris of Harris University, and Brent White, University of Arizona law professor comments on this topic. I found them to be very helpful.
Brent White, University of Arizona law professor answers this exact question in his book, “Underwater Home: What Should You Do if You Owe More on Your Home than It’s Worth?. Borrowers need to factor in their personal situation, and the laws in their state. Financial institutions and the government, he writes, “have acted to make sure that underwater homeowners and not lenders bear the primary burden of the housing collapse.” (Left unsaid is that taxpayers, too, could bear the costs of mistakes made by lenders, Fannie, Freddie, the government, and homeowners that walk away.) When a borrower defaults (foreclosure or short sale) they aren’t truly walking away unharmed.
- They lose THEIR HOME
- They lose a good credit rating for a time. All their interest rates, insurance rates will increase.
- They lose their ability to buy a home again anytime soon. Post short sale closing a former owner can buy in 24 months…after a foreclosure a former owner is banned from buying a home using government insured mortgages for 7 YEARS.
- Potential for their credit rating to be prevent them from obtaining a job (or a promotion). If they work in jobs that required a security rating (military, federal jobs etc) bad credit could cause harm.
- Maybe a minor point but, the hassle and expense of moving.
- The stress on their families. How many people are getting divorced, losing their health over a underwater mortgage?
- They lose the money they invested in the home…down payment, window coverings…etc.
Bottom line, folks losing their homes either because of hard ship or strategically are suffering. It’s an incredibly stressful process. Your lender knew the bargain that it was making when it loaned you the money for an interest only or adjustable loan or home equity line of credit, including that it was loaning money on a home with a possibly inflated price. It also knew that you might default if prices crashed.…but there was so much demand on Wall Street for more loans, that the lenders virtually threw themselves at the consumers.
If your lender miscalculated the risk of defaults due to a housing collapse, that‘s not your fault. You aren‘t barred from collecting on an insurance policy if your insurance company miscalculates the chances of a tornado and wishes that they had charged you more. If your lender miscalculated the risk of a housing collapse and borrowers defaulting as a result, that‘s the lender‘s error. It will be more careful next time. But you still have an option to default.
Under what circumstances, then, is it reasonable to walk away?
I think it‘s OK to stop paying the mortgage long before you clean out your savings, sacrifice your retirement, spend your children‘s college fund, and certainly before you have to start using your credit cards to survive. Before you do any of those things, I think the more moral course is to stop paying your mortgage. Indeed, I think it‘s morally acceptable to default if your mortgage threatens your ability to save adequately for the future, regardless of whether you can pay it according to some arbitrary definition of “affordability.” It may be more responsible to put the money saved from giving up your home and renting instead into an investment account, so that you are secure in retirement. Or put it into a college fund, so that you can give your children a chance at a higher education.
