According to CNN Money, “Some homeowners, no doubt, believe that the credit score hit is worth getting out from a deeply underwater mortgage. They may owe, say, $500,000 when their house value is only valued at $350,000. And, they figure, there’s no way it will ever be worth what they owe so it’s better to get out from underneath the burden.
After default, they reason, they can raise their FICO scores by paying all their bills on time and eventually finance another home purchase.
Don’t count on it. While homeowners who default due to economic hardship, such as a job loss or divorce, normally must wait two to five years before buying a home again, walkaways may face double that time.
“It could be well over seven or eight years before [walkaways] are able to obtain a mortgage to buy a home again,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association.
Strategic defaulters might also be charged higher interest rates, even above the levels other borrowers with similar credit scores would receive.”
Strategic Default Affects More than You Think
Clearly, there are cases where this strategic default scenario makes sense. I am not the type of real estate broker who is going to argue that homeownership is for everyone. Nor am I going to make a righteous or impassioned speech about your financial obligations or modern American contract law (admittedly, that dissertation would be fun to compose). I also understand the argument of those who choose strategic default can rent a replacement property for the next decade until they decide to reenter the real estate ownership arena. Honestly, those who argue for strategic default can make the whole scenario sound fiscally responsible and, sometimes, even a tad sexy. Like a renegade cowboy in Deadwood who frequents the ‘Storyville’ areas of town…until Wyatt Earp shoots me, er, him.
The truth is that your FICO score and creditworthiness are driving factors behind more than just real estate purchases. Unless you are flush with the green, this score will not only drive your ability to purchase automobiles, receive student loans and establish trade lines, but it will also aid in determining the interest rate. Obviously, the worse your credit scores are, the higher risk you present to a potential creditor, the higher your effective interest rates will be. This can make digging out of a hole infinitely more difficult should you ever need to lean on credit during any future time in your life.
Most people don’t even understand how their FICO score is calculated or even what it is. Learn about both, straight from the source: What’s in your FICO score