“Short sale” versus short walk

By one expert’s estimate 5.3 million US homes have a mortgage that is more than 20% higher than their home’s value and 2.2 million of those are “under water” by more than 50%.  It is very hard to keep paying your mortgage — even though you can afford it — when you know that you have no equity in your house and you are working for the bank.

According to a recent article in the Wall Street Journal, more and more Americans are deciding not to keep up with those payments.  Some are arranging to sell their homes for the current market value with the lender’s agreement to take that amount in full payment of the mortgage.  This is a “short sale.”  But for those whose banks won’t make such a deal, the solution is simply to stop making payments on the mortgage and move out — sometimes to a previously foreclosed home in the same neighborhood that is now for rent.  The bank then forecloses.

This strategy can significantly reduce your debt, but it is not without its problems.  It will always result in a reduction of your credit rating of up to 160 points, and it will stay on your credit record for seven years, making it harder to get loans and increasing the interest you pay on any you do get.  It will also be at least three to five years before you can qualify for a mortgage to buy a home.

Beyond that, the aggravation depends on the state where you live.  Every state has different rules and you should check yours before doing anything.  Some states (such as Arizona and California) do not allow lenders to pursue your other assets for any balances due after foreclosure, but in most  states, the lenders can attach other assets you may own.   In many states, the lender can sell your unpaid balance to a collection agency that can then chase you for up to 20 years.

Check our main entry on the federal rules that govern the behavior of collection agencies.

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