Are you underwater on your mortgage? Millions of Americans are. Millions of homeowners find themselves in foreclosure. There’s another group of homeowners who have decided that a strategic default on their mortgage is their best course of action. If you have been considering a strategic default, you should know that those who have decided strategic default of their mortgage is the best option, may face much more harsh consequences than those that defaulted simply out of an inability to pay.
The most obvious consequence is that defaulting on a mortgage means you will take a major hit on your credit score. You can expect that if you had a credit score in the 700s that it will change to the mid-500s after a default. That applies whether you lost your job, or didn’t make your payments. How long it will take you to recover from a strategic default is a far different issue.
Lenders have a come much more discriminating when it comes to making home loans and other types of loans. Pristine credit remains a premium and always will. However, lenders are in business to make money and they make money by making loans. If your record shows a unavoidable life-changing event, like job loss, lenders will consider that. However, a strategic default will show on your credit report as a strategic default, and lenders will not likely look upon your application with favor.
For example, Fannie Mae has stated that they are not willing to purchase a low or guarantee a loan from someone who strategically defaulted on a mortgage until seven years has passed. Conversely, if you had one of those life-changing events and have demonstrated after two or three years a record of paying your bills, that would work to your advantage.
Strategic Default and Renting a Home
Nearly all potential landlords will check your credit before approving a lease. These days landlords have more renters to choose from and will always choose those with a better credit histories.
Over 90% of insurance policy rates issued are based on credit scores. Be prepared to pay more for your insurance if you have a lower credit score.
Utilities and Cell Phone Costs
You can expect to pay more for deposits on utilities and cell phones. In fact, our culture dictates that a creditor must scrutinize everyone’s credit score more carefully.
How do creditors know if you are a strategic defaulter?
Generally, strategic defaulters had higher credit scores to begin with. They use their credit lines less and typically have lived in their home for a shorter period of time, thus having less attachment to it.
Still many people are choosing strategic default as a course of action for mortgage underwater. Strategic defaults have not risen since the fall of 2010. Nearly 30% of all mortgages are underwater. Foreclosures and strategic defaults are not good for anyone, but most importantly they are not good for you. If you are one of those whose mortgages underwater, you should exhaust all opportunities and alternatives to a strategic default or foreclosure. If you have the ability to pay for your mortgage, and choose not to via a strategic default you may want to reconsider your plan and consider foreclosure help options.