Buying a new home and walking away from the mortgage is an option that is often considered by homeowners with an upside down mortgage, which is the result of the real estate bubble that has burst. This means that the homeowner bought the house when selling prices were high and took out a mortgage loan for it.
Now that the prices of homes have declined drastically, these homeowners now have a mortgage loan that is much higher than the value of their homes.
Thus, it is no longer encouraging to be paying a loan for an amount that is much higher than the propertyâ€™s current price. With home prices dropping to very low levels, buying a new home would be a more attractivealternative than just sticking it out with the current home where you are paying for a loan that is much higher in value. Many brokers and real estate agents are now coaching homeowners on how to walk away from their mortgages and buy a new home.
This may be possible in a non-recourse state where the lender cannot come after you and force you to pay the difference between the amount that he was able to sell your property and your loan balance. However, those who bought their homes or refinanced it through a personal line of credit should be aware that the lender could come after them even in non-recourse states, such as Arizona and California.
However, even if walking away from your mortgage is legal, it still has some disadvantages. First of all, this would mean that your property would likely go into foreclosure and this would hurt your credit score. This would make it impossible for the homeowner to obtain an unsecured loan for seven years because the foreclosure remains in his credit report for that duration.
There is also a waiting period after a foreclosure before you are permitted to get another home loan. In response to these trends, Fannie Mae has increased the length of the waiting period from four to five years. In addition, the borrower would have to comply with a minimum credit score after the five-year period is over and he would have to pay 10 percent as down payment.
Despite the disadvantages, many homeowners are planning to just walk away from an upside down mortgage. Even in those cases where it would be possible for the lender to sue them, many borrowers are also planning to take their chances with the hope that the lenders will be swamped with such cases and would then decide not to pursue them because it would take too much time and it would be very expensive. Some homeowners are also discovering that they could take out a new loan in another state before their current home is foreclosed.
Nevertheless, the mortgage industry is beginning to discover the presence of these loopholes and they are quickly moving to plug them up. Mortgage underwriters are becoming stricter in their requirements for a person to qualify for two home loans. Like all serious financial situations, you need to make sure and do the research yourself as to the implications for your particular situation.
My name is Maurice “Moe” Bedard. I am the founder of America’s #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.