Real Estate Insights

The major sources for mortgages have recently issued warnings for those who may think that walking away form their mortgage and allowing their home to fall into foreclosure is no big deal. Well in fact, Fannie and Freddie have not issued formal updated to their guidelines aimed at walkways and other foreclosure situations. So if you know of a client, colleague or friend who may be considering foreclosure as an option, please pass on the warning.

Fannie Mae will now prohibit foreclosed borrowers from getting another mortgage through it for five years unless there are “documented extenuating circumstances.” In those cases, they will not extend credit for up to three years. And even after five years has passed, these borrows will have to make at least a 10% down payment and will need a credit score of at least 680 or better. They will also be under strict underwriting guidelines and every circumstance leading up to the foreclosure must be documented.

Freddie Mac, Fannie’s rival, counts foreclosures as a major credit blot for seven years.

Walk-aways have been becoming increasingly prominent in hard hit housing markets where many homeowners are finding themselves upside down in their loans, owing tens of thousands more than the current value of their homes. And if these borrowers have invested little or nothing down in their homes, then they will be more likely to walk form their current obligations, even when they can still afford the payments.

A number of sources have been spreading rumors lately claiming they can help mitigate the hassles of bailing on a mortgage. But the truth is that a foreclosure will sting and most likely it will stay on a foreclosed borrower’s credit history for up to 11 years.

In fact, Fair Isaac, developer of the FICO scores used in most mortgage transactions, states that its scoring model counts foreclosure as a long-standing and even severe event, nearly comparable to bankruptcy, with negative consequences for all forms of credit that walk-aways might seek to obtain. This might include credit card applications, auto loans, student loans, and even insurance and employment.

Walking away from a mortgage can also cause a borrower to incur federal income tax liabilities. Those that choose to walk away may face a demand by the IRS for any amounts of debt that were unpaid by the borrowers. But the good news is that Federal legislation was passed earlier this year that will enable those who are able to work out loan modifications or short payoffs the ability to have their liabilities forgiven by the IRS.

Bottom line: If you walk away form a mortgage be prepared to face the consequences – don’t expect to get another home loan, certainly one with favorable mortgage terms, for five to seven years.