Thinking About Walking Away From A Mortgage? Get The Facts First

Millions of Americans have underwater mortgages as a result of the recent national real estate collapse. If your home value is 75% or less of your mortgage balance, you may have asked yourself if hanging on to the house is worth it, and like many people, you may have thought of simply walking away from a mortgage, even if you can still afford the mortgage payments. How bad could it be, right?
Well, before you make a decision, you should consider the ramifications of walking away from a mortgage. Voluntary foreclosure can damage your credit, raise your taxes, and limit future job possibilities and rental options.

Problems with walking away from a mortgage

Credit scores. Walking out will play serious havoc with your credit score, experts say. If you have stellar credit, your score will fall by 100 points or more. If your credit is not so great, it won’t fall as far but you will still wind up in the same place – the bottom of the credit ratings.

Tax implications. Many people don’t realize that the IRS regards unpaid debt as income. That includes mortgages. However, due to temporary legislation, homeowners may get some relief from these tax obligations. If you default on your primary residence, according to the new legislation you may not have to pay income taxes on that amount if the debt was incurred between 2007 and 2012. After that, taxes again take effect. The tax relief laws only apply to a primary residence and not to a second or vacation home, or to rental property. Also, you must still pay taxes on unpaid debt of more than $1 million for single taxpayers and $2 million for married couples filing a joint return.

Rental issues. Think you are going to rent for awhile after walking away? You might want to think again. Landlords do credit checks, and if they see that you have run out on a lender, leaving a large debt, they will certainly not think you are a reliable renter.

Limited employment options. If you are looking for a new job, be aware that employers often check credit reports on potential employees as part of the hiring process. You may be knocked out of the competition, especially if you are looking for work that requires handling or overseeing other people’s money, due to the fact that many employers see someone with poor credit as untrustworthy.

Your credit scores will improve with the passage of time, but the foreclosure will show up for 7 years, although with each passing year the credit impact will lessen.
You may want to look into other, less damaging ways to get out of a mortgage you can’t pay. Check out this and other articles on short sales. You can only short sale your home if you can prove hardship, such as a job loss. Merely being underwater on your home is not enough.