If You Walk Away, How Long Till You Can Own Again?by Tim Manni
When it comes to strategic defaults, otherwise known as “walk aways”, we’ve covered everything from the moral dilemma surrounding the decision, to the impact it could have on your credit score, to the tax implications.
Now we want to examine just how long it may take a borrower who strategically defaulted to own a home in the future. Like nearly everything surrounding strategic defaults, there’s a certain amount of debate concerning this issue as well.
There are a few simple facts about walking away from your mortgage that I think pretty much everyone can agree on: 1) For borrowers, the decision to walk away is a “business” decision. Deciding to do so often means it’s in their best financial interest. 2) Walking away will seriously impact your credit score — Money Magazine says a borrowers with a credit score of 780 who decides to walk away will see their score drop by 150 points.
However, there is one fact about walk aways that not every expert agrees on: how many years will borrowers who have walked away have to wait until they can own a home again?
While homeowners who default due to economic hardship, such as a job loss or divorce, normally must wait two to five years before buying a home again, walkaways may face double that time.
“It could be well over seven or eight years before [walkaways] are able to obtain a mortgage to buy a home again,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association.
Not everyone, including our own VP Keith Gumbinger, thinks strategic defaulters will have to wait seven or eight years before banks are willing to lend to them again:
“It might be a little more difficult for them to borrow, but [banks'] drive for market share — to profit from making loans — will trump that caution. I don’t think we’ll see a full denial.”
It’s hard to foresee the state of mortgage lending six or seven months from now, let alone seven or eight years into the future. So lenders may look at applications from one-time strategic defaulters and say, “Yes, they walked away but it’s a whole different market now,” according to Gumbinger.
While everyone is not in an agreement on just how long those who walk away will have to wait for a new mortgage, there is one consensus: strategic defaulters won’t have it easy. Brinkmann estimates that added lending restrictions-, such as requiring 30% down, will be instituted. Fannie Mae recently announced that those who choose a short sale over walking away can apply for a new loan in much less time.
Readers: Do you think those who walked away should get another mortgage? If not, how do you think that will affect the housing recovery?