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Foreclosure: How bad can it be?

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By : Greg Smith    99 or more times read
The implications of foreclosing on your mortgage are as serious as ever; however, with foreclosures becoming more and more common, there are fears that homeowners are not taking them as seriously as they should.

In 2008, approximately 588,000 mortgage holders walked away from their homes. That is double the 2007 figure and those numbers are expected to keep climbing as the recession continues and more and more homeowners owe more than their homes are worth.

It used to be that foreclosing on a mortgage was embarrassing and shameful for the homeowner who could not make the payments. Now, because so many people are left with what seems like no other options, the stigma associated with losing a home does not seem so great. "The disturbing aspect of this is that it's becoming acceptable to do" says J. Naroff of Naroff Economic Advisors, "What does this mean down the road for housing and the economy if people are happy to walk away and destroy their credit? There also appears to be a contagion effect. Borrowers who know someone who defaulted are 82% more likely to declare their intention to do so.

The reasons for foreclosures now go beyond simply not being able to afford mortgage payments. Owing more than your home is worth, or being underwater, is quickly becoming the reason for defaulting on a mortgage, and with an unprecedented 16 million homeowners currently underwater (expected to rise to 17.4 million by the end of 2010) this trend is becoming all too real. Homeowners who are underwater are coming to the conclusion that it no longer makes financial sense to hold on to their homes and are choosing to do a strategic default or voluntary foreclosure. According to an Experian-Oliver Wyman study, the number of strategic defaulters in California went up an astounding 68 times between 2005 and 2008; not surprising when the median price for a single family home fell from $522,670 to $346,410 in the same period.

Although it may seem like foreclosure (voluntary or not) is the only way to go, you still need to seriously consider the implications of such an action. Walking away from your mortgage should not be taken lightly - it can strip 100 points off your credit score and make you ineligible for a new mortgage for 7 years. There is also the security and sense of pride that comes with home ownership and the sense of failure that could be associated with losing your home. And do not think the deal is done just because you have walked away from your home and mortgage, in many states lenders can seek a court ordered deficiency judgment. If the lender sells the home after a foreclosure for less than what is owed on the loan, the bank can come after the borrower for the deficiency balance. Many states give mortgage holders up to five years to obtain a deficiency judgment. If the judgement is granted, the bank can take up to 20 years to collect with an option to renew for another 20 years if the debt remains unpaid.

Unfortunately, there are many situations where a foreclosure is the only option, but if you are walking away from your home simply because it is no longer worth what you owe, you may want to think twice. There are currently federal programs being created to assist homeowners in this situation; so be patient and explore all of your options. Remember, giving up your home, credit rating, and pride can have long lasting effects on you and your family and could be far worse than waiting out the housing crisis and watching the value of your home rise again.
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