If you’re underwater on your mortgage, you may feel like you’re just throwing money away. With your home’s potential sale value less than what you actually owe on it, you could find yourself tempted to just quit paying your mortgage, even if you can afford the monthly payments.
The decision to stop paying your mortgage, regardless of your ability to pay it, is called strategic default. The consequences of strategic default can affect your credit score long after the bank has foreclosed on your house.
You may think backing out of your mortgage will be less damaging to your personal finances than continuing to pay for a home that you’ve come to consider a bad investment. But before you commit to this radical course of action, consider these three ways strategic default can affect your credit:
It will lower your credit score.
Defaulting on a home loan can lower your score by 100 points or more, and remains on your credit report for up to seven years. A lower score and such an imposing blemish on your credit report will likely make it difficult to secure good terms or new credit, and may convince some lenders not to extend you credit at all.
It may lead to legal action.
If you think the bank will simply foreclose on your house and call everything even, you could be in for an unpleasant shock. While rules vary from state to state, it’s possible your mortgage holder could take you to court in an attempt to recover some of the money they’ll lose on your house. In some states, they are allowed to sue you years after they’ve foreclosed on your home. Then, a deficiency judgment will appear on your credit report. And you would still wind up paying for your house, even though you would no longer be living in it.
It may affect your taxes.
Again, rules vary from state to state, but defaulting on your mortgage may have property and income tax repercussions as well. Before you make a decision, talk with an attorney, accountant and tax professional about any unforeseen consequences of strategic default. And be sure to explore all your options – from refinancing your home and renegotiating your current loan to short sale – before you make a decision that will have long-term repercussions for your credit.