Many Americans are finding themselves in an underwater mortgage. This means they may have purchased their house for $500,000 but due to the volatile real estate market their home may be worth just $250,000 while they are still making payments on a $500k home loan. Many feel like that the value of their home will rise enough in their lifetime in order to at least break even. As a result, may are choosing to stop payments on their mortgage and default strategically.

A strategic default is not the same as a default. People default usually have had credit problems and may have made late payments on their mortgage. On the other hand, many who choose to default on purpose have had excellent credit without any late payments. When they default it’s done very abruptly and they will continue paying all their other bills while stopping the mortgage payment specifically. A study by Experian showed that almost one fifth of all delinquent mortgages were strategic defaults.

One of the biggest concerns of defaulters is the potential of having the lender file a deficiency judgment against them. This means that the lender may want payment for the difference between the balance of what is owed and the market price of the home.

Residents in no-recourse states cannot have such a judgment filed against them even if they do default.

One of the main difficulties of defaulting is seriously damaging one’s credit report. The statue of limitations for negative credit items is seven years from the date of last activity.

A lower Fico score can make it more difficult to get a new credit card, get a car loan or even obtain a good rate on insurance. Future employment may also be affected because select future employers may perform a credit check as part of the screening process. It may also be more difficult to qualify for a mortgage in the future. Fannie Mae has announced that strategic defaulters will not be allowed to apply for a new mortgage backed by Fannie Make for seven years.

For a lot of defaulters, walking away from their home is a business decision; they may see it as walking away from a poor investment and may prefer to rent. Others may even want to take advantage of the low current rates and purchase a more affordable home; this may be difficult though with a default on the credit report. Most have only been in their homes for a short amount of time. This may be a key factor since these individuals are least likely to be emotionally attached to their home which makes it easier to walk away. Homeowners who are more underwater are more likely to default.

Defaulting is a serious issue and one may want to consider all of the repercussions before making a final decision. A poor credit score can affect one’s life for many years. In addition, there are also moral and ethical issues involved with walking away from one’s mortgage.

Written by Rachel Quinn – Gmac offers Home Purchase Loans for consumers looking for a home loan at great rates. We also have jumbo home loans available. Take a look at our Mortgage Interest Calculator in order to make mortgage calculations.

Written by Rachel Quinn – http://www.gmacmortgage.com/home-loan.html http://www.gmacmortgage.com/mortgages.html http://www.gmacmortgage.com/apps/calculator/mortgage-calculators.htm?method=init

Author Bio: Written by Rachel Quinn – Gmac offers Home Purchase Loans for consumers looking for a home loan at great rates. We also have jumbo home loans available. Take a look at our Mortgage Interest Calculator in order to make mortgage calculations.

Category: Finances
Keywords: strategic default, strategic default consquences, strategic default mortgage