Mortgage default, deduct over 200 points

It’s no coincidence that the word “mortgage” sounds a lot like mortician, morbid, morgue, and mortified.  In fact, mortgage literally means "dead pledge".  Put another way, it is a deal that dies either when the debt is paid or when payment fails.  However, these days it seems to mean something more ominous: a monthly visit from the Grim Reaper. 

Because more and more people cannot fight off the Prince of Death in this dying economy of declining home prices and major layoffs, walking away from a mortgage is becoming more common.  Reasons range from the house being underwater to not being able to make the payments. 

If you are considering the kiss of death, think again because the consequences of doing so are catastrophic –perhaps deadly is more apropos-- to your financial well-being. 

Read your horroscope. The following is an excerpt from a recent Wall Street Journal article: 

“…the penalties for defaulting are great. In most cases, walking away from a mortgage can knock a top credit score down to the cellar, says Ethan Dornhelm, a senior scientist at Fair Isaac Corp., which sells credit-scoring formulas to credit bureaus.

A person with a stellar credit score from the high 700s to the top score of 850 would see it drop more than 200 points. A person whose credit score is lower may see it fall by fewer points, but still end up with a score in the mid 500s. At that level, reasonably priced new debt, from credit cards to car loans, will be out of reach. In addition, a default could lead landlords and utilities to require more cash up front and even affect your job prospects.

If the borrower continues to pay other debts on time, the score will climb gradually, though it may take three to five years to return to "good" scores, from the mid-600s and up. Scores of 790 or more -- which are rewarded with the lowest interest rates -- won't be attainable for at least seven years, when the default blemish finally disappears, Mr. Dornhelm says.”

Comments

[Daniel]

I recommend that you can walk away from your overpriced house. FHA will give you another mortgage loan after 6 MONTHS as long as you have stayed current on your credit card bills.

[George]

What do you expect? You default on a mortgage, walk away from it and then are shocked because your credit goes down the drain? Seriously people.

[Holly]

Wonder what happens to the untold number of real estate investors, having a hard time unloading one or two properties that for one reason or another no longer have/can get tenants? If their personal credit is outstanding, and other rentals are in good standing, but they are forced to default on one property, will there be any safety net for them?

[patricia]

however, no one blows the whistle or admits that those companies established as "credit" rating people are notorious for totally off the wall screw ups. when they became sanctioned as the last word on everyones credit is a mystery. i wish someone would do some investigative journalism and real digging to see the dynamic of how these organizations crawled out of the woodwork and became part of an established respected entity.

[Joy]

My credit score actually dropped almost 200 or so points AFTER I bought my house. The bureaus said that the reason was because more debt was incurred. I had to make at least three mortgage payments before it came back up.