It doesn’t take long for homeowners to realize that purchasing a property is merely the beginning of a lengthy process. If you have a 30-year mortgage, you’re looking at roughly 360 monthly payments, not to mention the additional financial commitments that come with homeownership—such as maintenance, property taxes, and insurance costs. You might quickly find yourself feeling more house poor than you ever anticipated.

There’s ‘house poor’ and then there’s a state of house poverty, where the mortgage payments become unmanageable. This year, a significant portion of the population has reported struggles with their mortgage or rent payments. The usual guidance suggests reaching out to your lender, exploring governmental assistance programs, or contemplating a short sale. However, there exists another option that may be worth considering: defaulting on your mortgage and walking away.

What is a Strategic Default?

A “strategic default” is when you decide to stop making mortgage payments and instead redirect those funds to other pressing expenses. Often referred to as “voluntary foreclosure,” this approach requires you to set aside any emotional attachments to your property, allowing the bank to reclaim the home and attempt to sell it to recover the borrowed amount.

Opting for a strategic default should be carefully weighed and is only advisable under specific conditions. Before deciding to completely abandon your mortgage responsibilities, it’s crucial to consider the potential repercussions:

• Impact on Credit Score: This choice will likely substantially damage your credit score, potentially reducing it by as much as 160 points.

• Challenges in Securing Housing: If you attempt to rent after this, landlords may decline your application if they discover your poor credit history, and securing a new mortgage will be difficult.

• Risk of Deficiency Judgments: Depending on your state’s laws, if the home sells for less than the remaining mortgage balance, lenders might pursue you for the difference through a deficiency judgment, which limits the effectiveness of a strategic default.

Deciding to abandon your mortgage is a serious step with considerable factors to contemplate.

Recognizing When You’re Underwater

Being “underwater” refers to a situation where the outstanding mortgage amount exceeds the current value of the home. It’s particularly severe when this difference is 25% or more. For instance, if your mortgage balance is $200,000 but the home’s market value has plummeted to $150,000, you find yourself in a serious predicament.

In these challenging circumstances, recovering your home’s value could take many years–years during which you must continue paying your mortgage, provided it is within your means. Even if you’re able to keep current with your mortgage, the associated costs of homeownership might mean you will never recoup your investment. Difficulty in securing loan modifications may prevent you from accessing your equity, and a short sale will likely not satisfy the outstanding debt. Therefore, instead of continuing to invest money in a losing venture, it may be worthwhile to consider walking away—especially if affording your monthly payments poses a challenge.

When Your Credit is Already Compromised

The aforementioned considerations regarding strategic default will severely impact one’s credit score in the long run. However, if your credit situation is already dismal, the additional decrease from a strategic default may not significantly alter your immediate circumstances.

Recovery should also be factored in; while minor financial issues may improve your credit score after a few months, a foreclosure—even voluntary—can linger on your report for approximately three years. Consider the long-term ramifications of a ruined credit score. If your credit is already in tatters, defaulting on the mortgage could provide you the opportunity to reallocate those funds toward settling other debts, enhancing savings, or navigating financial challenges in a more positive direction.

Understanding Deficiency Judgments

Ensure that your state does not permit deficiency judgments. For example, in Florida, if you owe $200,000 on your mortgage, but the house only sells for $135,000, you will still be held liable for the remaining $65,000. The bank could then pursue a deficiency judgment, potentially leading to garnished wages as repayment for the mortgage balance, effectively prolonging the financial strain.

In a situation wherein your mortgage is underwater, your credit score is poor, and you’re residing in a state that forbids deficiency judgments, opting for a strategic default could provide significant financial relief and become a practical solution. Otherwise, pursuing loan modifications or considering a short sale would generally be more advisable paths to take.