The tough real estate market gripping large sections of the country has incubated multiple trends and one of the more noteworthy of them is the mortgage walkaway. This is where a distressed homeowner or an out-of-luck investor decides to cease loan payments and at some point later on hands in the house keys to the lender. Many of them believe that the action will just like that solve their mortgage payment problems and they will be able to start anew somewhere else.
It's not that easy, however. Fannie Mae, the mammoth buyer of mortgages on the secondary market, issued new guidelines to banks regarding walkaways and several other foreclosure scenarios. Foreclosed borrowers won't be approved for loans it purchases for five years. The only exception is if there are "documented extenuating circumstances" and then the ban is only three years.
There is more to it than that. After the five years the previously foreclosed applicant has to have a FICO score of 680 and up and needs to put down a minimum of 10%. On the surface these terms don't look like much, but in reality they do have a fair amount of bite to them. This matter has become especially acute in the former boom states of California, Florida and Nevada.
Freddie Mac, Fannie Mae's sister shop in the secondary market, has similar tougher guidelines while its buying moratorium is even longer, seven years.
Foreclosure of course is a serious issue and FICO truly takes that into account. Damaged credit score can affect the consumer in many other ways, too. FICO plays a critical role in the approval process for car loans, student loans and credit cards and its negative effects can taint an employment application and also an insurance request. Walking away is easy, yet dealing with the potential consequences is anything but.
And then there are the helpful Internet websites that cater to walkaways and others in the same league. They make all sorts of promises that sound exciting. They range from the ban period possibly being reduced to two years to perhaps allowing the homeowner to stay in the house without making any payments as long as twelve months. The fees they charge for their counsel, kits and plans are up front. Due diligence here is advisable.
Walkaways will find the road ahead rather bumpy.