An early warning system to help lenders detect impending strategic defaults could serve as a blueprint for homeowners considering walking away from their mortgage and that could encourage more strategic defaults.
Read More...Home financing is a critical part of any real estate transaction. Here, you will find some outstanding information that may assist you in the purchase of your next property.
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This month I would like to spend some time focusing on a hot topic in the mortgage industry - Strategic Defaults. If you have ever considered this this as an option if your real estate investment is underwater, please read on...
Who would risk the negative impact of defaulting on a mortgage if they didn't really have to? About 17 percent of Americans who defaulted on their mortgages in the second quarter of 2010 did exactly that, according to a study by Experian, the leading global information services company.
"Strategic default" - choosing to stop paying on your mortgage even if you can afford the monthly payments - peaked at the end of 2008 during the height of the Great Recession. At that time, strategic defaults accounted for 20 percent of all mortgage defaults 60 or more days overdue, according to Experian.
And while the percentage of Americans taking this option has steadily declined since then, the credit risks for strategic defaulters remain unchanged.
"Not paying your mortgage will have a far-reaching, long-lasting impact on your ability to secure future credit, regardless of the reason for your default," says Charles Chung, Experian's president of Decision Analytics. "Experian's study indicates that many strategic defaulters continue to faithfully pay on their other debts. Some even purchase other homes for better terms before selectively defaulting on their upside-down mortgage."
Defaulting on your mortgage is the second most damaging thing you can do to your credit, even if you continue to pay your other bills. Only bankruptcy will affect your credit score more adversely than foreclosure.
Foreclosure remains on your credit report for seven years. During that time, securing other credit at reasonable terms and rates will be very difficult, if not impossible.
Potential employers are looking at credit reports. In fact, 60 percent now check applicants' credit reports, according to an article in the Washington Times. By impacting your credit, a strategic default may affect your ability to get a job.
Last year, Fannie Mae, the government-controlled mortgage giant, said it would implement a policy to prohibit strategic defaulters from getting a new Fannie Mae-backed mortgage for seven years from the date of foreclosure.
Finally, in some cases, the debt that foreclosure "erases" may be recorded as income, which means you will have to pay taxes on it.
"Some may see strategic default as a way to get out of paying a bad debt," Chung says. "But its associated costs like a lower credit score, higher interest rates and less ability to secure future credits, can wipe out the financial benefit of no longer having a mortgage payment."
Getting an idea as to the price of the home you can afford is an important first step in the home buying process.
Determining what you think you may be able to afford is one thing; finding out what the banks are likely to lend is another!
Understand the financial differences between renting and homeownership.
Discover the potential tax savings associated with homeownership.
Understand the costs associated with refinancing your home and consider all of your options if facing a financial crisis.
Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage--whether it’s a home purchase, a refinancing, or a home equity loan--is a product, just like a car, so the price and terms may be negotiable. You’ll want to compare all the costs involved in obtaining a mortgage.
Finding an affordable home loan with fair terms and reasonable costs is a crucial step towards achieving homeownership. Unfortunately, some lenders offer predatory loans that take advantage of consumers. This brochure identifies the warning signs of predatory loans and offers you tips on how to avoid them. It also provides a list of questions you should ask when shopping for a loan. Produced jointly by NAR and the Center for Responsible Lending.
The Federal Housing Administration has made significant improvements to its mortgage insurance programs. Many aspects of the FHA application process have been streamlined to be more user-friendly and efficient. This brochure outlines the changes to FHA, how to qualify for an FHA mortgage, and other resources available from FHA, HUD, and NAR. Produced by NAR, the FHA, and the U.S. Department of Housing and Urban Development.
Practice making good financial decisions at Credit-Power, an animated Web site with characters and real-world scenarios!
