There are many homeowners who have found themselves in the unfortunate position of being underwater on their home. Some of these homeowners live in a neighborhood where home values have declined, and others took out too much in home equity loans. In some cases both happened.
While it’s understandable that these homeowners are frustrated, some have decided to simply walk away from their homes, even though they can afford to make their monthly mortgage payments. This is known as strategic default. There are numerous problems with the decision to walk away from one’s home when the borrower has the ability to pay.
Is walking away from your mortgage moral?
First, there is a moral aspect to the decision. You signed a contract and agreed to pay a monthly price for your home. Unless the contract had a stipulation that you can walk if your home’s value falls – and I’m not aware of a single mortgage contract like that – you are not fulfilling your obligation. Some will argue that it’s a business decision, but I think it’s more than that. After all, would a homeowner whose home appreciated in value call it a “business decision” if the bank decided to increase their mortgage payment as the home’s value rose? I seriously doubt it.
I believe we are all obligated to honor our contracts unless there are extenuating circumstances which prevent us from doing so.
I want to be very clear that when I talk about the moral aspects of walking away from a home, I’m talking about people who can afford their payments. I know first-hand that there are people out there who really cannot afford to make their payments and want desperately to stay in their homes. Those people may not have a choice when it comes to giving up their home.
Who does walking away hurt?
In essence, walking away hurts the homeowner who is walking and every other homeowner out there. As homes are sold as short sales or foreclosures, the values of neighboring properties decline. If homeowners walk away from homes they can afford, it just perpetuates the cycle. The only way neighborhoods are going to recover is for homeowners to hang in there and watch out for one another.
I’m a fairly optimistic person, and I truly believe the tides will change and properties will eventually regain their values. Those who think they’ve lost the equity in their home forever are really creating a self-fulfilling prophecy by contributing to declining property values and adding to the amount of foreclosures and short sale homes that are sitting on the market.
I’ll just rent after I walk
Homeowners who think that they can walk away from their homes, rent for a bit and start over are going to be in for a big surprise.
When someone lets their home go into foreclosure, it harms their credit score and leaves a black mark on their credit report. It’s a black mark that will stay on their credit report for seven years. Many landlords do credit checks on their potential renters. Seeing a foreclosure is likely going to be a red flag to the landlord that you’re not capable, or willing, to make your rent payments on time.
The foreclosure is also going to be a red flag to lenders if the homeowner would like to buy a home or take out any new credit in the next seven years. In addition to the decision of whether or not to give a potential homeowner a mortgage, lenders also base interest rates on the borrower’s credit score. The borrowers with the best credit scores get the best mortgage terms and/or interest rates. A foreclosure is going to put the borrower in a bad position when it comes to getting credit … if they can get credit.
Allowing a home to go into foreclosure clearly isn’t something that should be taken lightly or decided quickly, especially if the homeowner can afford the monthly payments. I would urge people to consider all of the long-term effects of a foreclosure, including their plans for the next seven years, before making a final decision.
Kristen Doerschner is the public relations coordinator for a non-profit debt relief agency and a freelance writer. Through her writing, Kristen covers a variety of topics, but specializes in issues related to financial education.