Strategic Housing Default

“My rental property is more than $100K upside down. I’ve got great credit but I need to consider all my options. What’s the impact on my credit if I walk away?”

This was the question waiting in my inbox this morning. It’s the most common question I receive and the most difficult to answer. In any other time period it was simple – don’t walk away unless you have no other choice (e.g., lost your job, divorce, illness). Today, strategic defaults are in vogue.

Accordingly to CoreLogic, 24% of homes are upside down. For many, it will take 5-10 years of payments to simply breakeven on their property. That’s about the same amount of time a short sale or foreclosure sits on your credit report. So, if you’re $100K down on a modest property, walk away….right?

Not so fast. There are a few questions you should ask yourself before packing your bags.

• Can you do it? In some states, banks can file judgments for the difference between the ultimate sale price and how much you owe. Judgments are not good and have an impact beyond your credit.
• How bad is it? If you can afford the payments and you’re down less than 20%, stick it out. Housing has always been a long term investment, now more than ever.
• What are the fundamentals? If your home is in a good neighborhood with good schools, consider sticking it out.
• What’s the full impact? Different types of default have different rules. As expected, it’s confusing. Make sure you understanding how default will impact your credit availability, ability to get credit in the near term, etc. See the big picture.
• Have you exhausted all your alternatives? Have you tried to rent, move back in (if it’s a rental property), lease purchase, seller finance, streamline refinance? If not, see if any of these options make sense for you.
• Are you comfortable with longer term uncertainty? Short sales and foreclosures sit on your credit report for 7-10 years but lenders can always ask if you’ve ever defaulted – so it always stays with you. Maybe lenders will be more forgiving of defaults during this crisis but no one knows and you must be comfortable with that uncertainty.

Despite the economic situation, there is nothing strategic about default. It’s a difficult process personally and financially. If you have no choice, make sure you find a credible advisor to help you navigate the process. Otherwise, try to find creative ways to weather the storm.

As for the email, my response was simple, “Your credit is only a small part of the equation. Make sure you’re thinking more broadly about the impact of walking away.”

What else? Do you know someone that has considered walking away from their home? What are the pros and cons?