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The Media Shouldn’t Be Your Financial Advisor

Major media, including popular news type TV shows are running stories about “strategic default.”  That’s when a homeowner walks away from a mortgage that they can afford, usually because the value of the home is now significantly less than the amount they owe on the mortgage.  But, before anyone considers this approach, there are important considerations:

  • Will you really get away completely free of obligations to the lender without bankruptcy?  Depending on the state in which you reside and the terms of your mortgage, the lender could come back on you for repayment of the difference in what you owed and what they eventually sold the home for.
  • The damage to your credit can keep you from getting a mortgage for seven years or more, or make the interest rate higher with much higher payments if you buy another home.  Other loans, car loans and credit card rates will go up as well.
  • The I.R.S. could require that you pay income taxes on the amount that was forgiven by the lender.  Example:  You owe $200,000, and they sell the home for $150,000.  You could be liable for income taxes on $50,000.

While recent TV coverage has “experts” saying that a trend toward strategic defaults could make lenders more amenable to writing down principal on loans, there’s no evidence that this will happen.  Also, if you’ve already defaulted, it’s too late to take advantage if this does become a lender trend.

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