It Might Be Better For Your Credit Score To Walk Away

In their Feb 06, 2008 article “Troubled homeowners: Can’t pay? Just walk away”, CNN/Money outlines the growing phenomenon of what they call “jingle mail,” i.e. putting your keys in an envelope and mailing them back to the bank. This is a horrible name. We need to come up with a better one now before this one takes off.

But I digress. Here is some of what the article said:

Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people.

Many buyers put little or no money down, so they don't have much invested in them. That leaves them with little incentive to keep making payments when a home's market value dips below the balance of the mortgage.

The most serious consequence is a tremendous hit to credit scores. For some, that's better than throwing away money they'll never recover by selling their home.

And while a mortgage default can savage a person's credit record, trying to pay off a loan they can't afford could be worse for borrowers if it leads to bankruptcy, said Craig Watts, a spokesman for the credit reporting firm Fair Isaac.

Credit scores are hurt much more by missing multiple payments - on credit cards, cars and so on - than by a single foreclosure.

"The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy," said Watts.

It typically takes three years of a spotless payment record after a bankruptcy before credit scores recover enough for someone to think about buying a home again, he said. After abandoning a mortgage, a person may be able to buy a new house in two years or less.

And now skipping out on a home is easier, thanks to the Mortgage Debt Relief Act of 2007. Previously, if a bank sold a foreclosed home for less than the mortgage balance and it forgave the difference, the borrower had to pay tax on that difference as if it were income. Now the IRS will ignore it.

This article addresses two of the big issues in walking away. Credit Rating and the tax hit on the forgiven amount. As we see now, it might be better for your credit rating to walk away. And the tax issue is gone thanks to a soft brained congress trying to pass populist legislation and only succeeding in making the overall problem worse.