Dear Liz: My son and daughter-in-law are thinking about walking away from their underwater mortgage. What are the long-term consequences? The house was purchased in 2005 for $577,000 with no down payment. It’s worth $370,000 and they don’t expect values to rebound any time soon.
Answer: A foreclosure would be a major black mark on the couple’s credit reports and probably would reduce their scores to subprime territory (below 620). Recovering from such credit blows is tougher than it was a few years ago, when lenders were still eager to give money to people with shaky credit.
That means your son and his wife could spend several years in credit limbo. They may have trouble renting an apartment, be required to make bigger deposits for utilities and phone service and even (in some states) pay more for insurance. Whether their credit will recover before home prices do, though, is an open question. Typically, negative marks like a foreclosure fall off credit reports after seven years, and credit scores can recover to near-prime levels before that.
A foreclosure also puts borrowers in a kind of penalty box with lenders. They may not be able to get another mortgage for four to five years. If they were to arrange a “short sale” or voluntarily hand over the keys to the bank, rather than waiting for a formal foreclosure, their “penalty box” period could be as short as two years, although they would still suffer significant damage to their scores.
If the couple are having trouble making their mortgage payment, they should contact a housing counselor approved by the Department of Housing and Urban Development (referrals at http://www.hud.gov to review their options and see whether they should try to pursue a mortgage modification to make their payments more affordable. Relatively few homeowners succeed in getting permanent modifications, but it’s certainly worth a try before they walk away.
They should also read attorney Stephen Elias’ book “The Foreclosure Survival Guide” to understand what may lie ahead.