Client Question: What happens when you walk away from your home?
No one wants to be faced with the decision of walking away from their home. However, it is important to know what you can expect and the things you need to consider in case you are ever faced with this decision. Summarized from a Yahoo! Finance article, below is a list of important things to consider:
- Walking away from your home should be your last option. Try re-financing. Rates for 30-year mortgage have significantly dropped and are currently about 4% or lower. If you are unable to re-finance through a bank try a government program.
- Look at your state’s rules regarding foreclosures. In many states, lenders can try to collect the difference between what you owed and what the home ended up selling for while other states the lenders cannot.
- Should you choose to default on your mortgage payments, start saving money as if you were still paying for a mortgage while you are still in your house. Contribute the amount of your monthly mortgage payment to your savings account. This will help you save up for a rental down payment.
- Be aware of the tax implications of walking away from your home. The IRS considers debt forgiveness to be taxable income unless you meet certain exceptions. If you do not meet these exceptions you could end up with a large tax bill come April 15th.
- Seek professional advice such as a bankruptcy or real-estate attorney, as well as a CPA in order to appropriately analyze your specific situation.
- It usually takes about 7 years to rebuild your credit after a foreclosure. Also, expect not to qualify for a mortgage or car loan in the next few years. Once you do qualify for a mortgage or car loan, expect to pay higher than normal interest rates.
- Your credit score will drop an estimated 85-160 points due to a strategic default depending on what your credit score is.
Walking away from your home is definitely not an easy decision. However, in some situations it is a last resort. If you have any questions or would like to review your options, please do not hesitate to contact us.