The Real Repercussions of Turning in the Keys to Your Home

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A recent study conducted by the Pew Research Center revealed that 36 percent of homeowners feel it’s okay to walk away from a mortgage loan, depending on the situation. In many cases, the present circumstance may be the result of something beyond the homeowner’s control, including job loss or an underwater mortgage.

However, even when suffering through these extenuating circumstances, is home abandonment really a good idea? Let’s explore the real repercussions of turning in your keys to help you decide if this is a path you should ever consider.

Homeowners Turning in Keys in Droves

As found in the study, a large number of homeowners feel it’s okay to walk away from a mortgage. In fact, reports show homeowners not only find it permissible, they’re actually doing it every day.

Banks have reported getting an increasing amount of “jingle mail” (mail with house keys) from homeowners who’d rather stop making payments than have the bank initiate the foreclosure process. This is occurring more often with those who have an underwater mortgage.

According to a recent Morgan Stanley research report, 12 percent of the mortgage defaults in February 2010 were strategic. Homeowners took this course of action because they wanted to pay off their credit cards, auto loans and other bills. Since they knew they would eventually no longer be able to make mortgage payments, they simply stopped paying sooner rather than later.

How Foreclosure Affects Credit

The main problem with home abandonment is that despite the fact the homeowner may beat the lender to a foreclosure filing, taking this action has the same effect on a homeowner’s credit as the foreclosure. This is because, in the end, the homeowner is walking away from a major financial obligation, which means serious repercussions will follow.

In many cases, a foreclosure can drop a credit score anywhere from 200 to 300 points. So even if your score was close to perfect, you will automatically fall into the below average or poor category. Not to mention, the foreclosure will remain on your credit reports for at least seven years, making it difficult for you to get personal loan, auto loan, credit cards or insurance.

Getting a Home in the Future

Once you’re stuck with bad credit, you may be forced into a number of unpleasant circumstances, like filing for bankruptcy to eliminate your debt. Of course, this is probably the last thing you want to do, but for some it’s necessary to begin move on.

Unfortunately, even if you clear your debt with a bankruptcy, you will likely have problems buying another home for many years. This is because the typical a lender won’t offer you financing for at least 24 months after a foreclosure or bankruptcy.

So if you’re thinking about walking away from your home, really consider the challenges you may face with purchasing a new one, or even renting a place to live.

Alternatives to Home Abandonment

The good news is there are some alternatives to help you avoid walking away from your home. Between the government and financial institutions, which have both tried to come up with ways to lower the number of bank owned properties on the market, a few solutions are made available:

• Short sale: The short sale is an option some homeowners take if they want to avoid foreclosure. By selling the home for less than it’s worth, they get it off their hands and keep their credit in reasonable condition. However, keep in mind that in order to get this done, the lender must approve.
• Loan modification: There have been a number of loan modification programs available over the past few years to help homeowners refinance at lower rates. The most recent is the FHA Short Refinance Program, which allows homeowners to refinance if they have a credit score of 500 or higher and total debt associated with the home no higher than 115 percent of its value. Also, the lender must be willing to write off at least 10 percent of the principal to qualify.
• Emergency Homeowners Loan Program: The government recently announced it would be paying up to $50,000 to some unemployed borrowers via the Emergency Homeowners Loan Program. They will receive assistance for up to two years and have no interest to worry about for repayment. Also, if they remain in the home for five years, the loan will be forgiven.
• Talking to the lender: Some homeowners with a good track record have found that simply talking to their lender and explaining their circumstances has resulted in lowered or temporarily forgiven principal payments and sometimes lowered interest rates. It doesn’t hurt to give it a try.

The temptation to turn in your keys may be huge if you have enormous debts and don’t know any other way to eliminate them. However, there are options available that could help you. So before you walk away, consider all alternatives and remember the long-term repercussions that could accompany this tough decision.