The Dangers of Walking Away From Your Underwater Home

NEW YORK (MainStreet) -- Sending the keys to the lender and walking away from a mortgage may look like the way to get your troubles behind you, especially today when it seems unlikely home prices will recover anytime soon. But it’s a little more complicated than that.

A walkaway may seem to make sense, despite the credit damage. Though the resulting foreclosure will hurt your credit for years, if you’re saddled with a home you cannot sell, you won’t be borrowing to buy a new one, anyway. If you can’t borrow for a car, you can keep the old one going or pay cash for a used one. Life without credit cards is inconvenient, but a debit card would serve just as well.

If financial troubles are inescapable, why not get them behind you as quickly as possible? Pay your bills on time afterward and in a few years your credit will be good again.

But before you accept this reasoning, be sure to assess other risks. A low credit rating can hurt your job prospects, and even make it hard to rent a home.

Also, depending on where you live you could face a “deficiency judgment,” where the lender goes after your other assets like cars, investments and bank accounts.

In some cases, lenders have lain in wait for years, watching credit reports and pouncing when it appears the borrower has regained a sound financial footing. Borrowers who thought the foreclosure ended their troubles are suddenly saddled with a new debt.

A deficiency judgment can cover the difference between what you owe and what your foreclosed home fetched on resale.

Experts say deficiency judgments have been rare in the past, mainly because they weren’t worth the trouble, since people who lost their homes had usually depleted their other assets. But that’s changing with the rise in strategic defaults, where financially healthy borrowers walk away from mortgages simply because they owe more than their homes are worth.