Fear of bad credit has homeowners paralyzed.
Homeowners who are upside-down on their mortgage and have no equity are kidding themselves if they think their value will come
back anytime soon. Should someone avoid walking away or “strategic default” just because they are worried about their credit? I don’t think that is a good enough reason to not. Here’s why. Bad Credit is like a knee scrape with a band aid healing in slow motion. If you take the band aid off and pick at it, or bump it… or keep scraping it, it won’t heal. But if left alone… it heals. Spending out of your savings accounts is like losing your hair. It just won’t grow back. Once it’s gone… it’s gone.
I have been really intrigued by this ever since my days in finance when I saw someone that had a bankruptcy 2 years prior and his score was higher than mine at the time (which was pretty good, since I had never missed a payment). What I didn’t realize at that time is that credit scores aren’t all about paying your bills on time. That’s only 35% of your score. This guys debts were wiped out, (which accounts for about 30% of your score) so simply, he had a better score, because he had no debt. He didn’t pay it off, he Bankrupted it. Now that should be enough to piss off anyone who sends a check each month to their creditors. But guess what, the credit system is pretty messed up. Here is a graph that shows this breakdown.
Now, after looking at that chart, say you had only one loan on your house and you had 3-5 credit cards and a car loan. Let’s say you paid everything on time, but your credit cards were maxed-out or close to it. I would say your credit score would be between 660-700 I have personally seen clients of ours who have defaulted on only their mortgage, kept everything else good, paid down their maxed-out credit cards and actually only damaged their credit scores by less than 50 points when all is said and done. Then each few months, the score naturally goes up as long as they continue to pay their loans on time and don’t go out and get a bunch of inquiries or new credit.
FHA will (if there has been a hardship) do a new mortgage after only 3 years from foreclosure. So if you are worried about your credit score being “ruined for life” then don’t buy into that crap. It’s BS! I beg any credit expert to challenge me on this.
So, how long will it take for your house to recover it’s value? Well if your house was worth $350,000 when you bought it, and it dropped 30%, it would now be worth $245,000. In order for it to return to $350,000 again, it would take a total appreciation of 43%. Yes you read that correctly. 43% appreciation is needed to get your house back to $350,000. Go ahead and get your calculator out to make sure it’s correct. Then look at what the historic annual appreciation is for your zip code. Let’s use 5% since that is the average where I’m at. It would take 8.6 years to break even again on your home. That is assuming we’ve bottomed out and there won’t be any more dips. Here is a good tool to use: strategic default calculator.
Here’s a question… Why does your credit history fall off after 7 or so years? Great Question! Well, it stems back thousands of years to the Bible actually. Deuteronomy 15:1 says “At the end of every seventh year you must cancel the debts of everyone who owes you money. Wouldn’t that be nice huh? Every 7 years, we get off the hook for all our outstanding debts. Well. it’s kinda like that with our credit reports.
Why should you care about your credit?
We run our economy on credit. It’s how businesses open, It’s how you pay for your kids braces and that family vacation. It’s important right?
Stop for a moment. Grab a piece of paper. Draw a line down the center. On one side write benefits of my good credit score, then start to list all the things you can think of…. ie. low interest rates on my car loan… etc.
On the other side, write the word debt. Write in the total amount you are in debt for including your mortgage. Yikes! Subtract your total assets from the debt, I’m assuming most people in this situation are going to have more debts than assets due to their devalued house. How much is your 750 credit score worth to you? 10k ? 100k? 250k?
Now, I’m not recommending you go out and stop paying all your debts. That’s not smart. Most likely you didn’t go out and max out all your credit cards just because you are addicted to shopping and can’t keep yourself from spending every penny of credit you have. If you are maxed-out, it’s probably because you slowly did it, over time.
Finances are a lot like calories. You eat more than you burn, you get fat. Period. If you spend more than you make, you get in debt. Period. It’s not rocket science. It takes self discipline and control, but it’s simple. I didn’t say easy, just that it’s not complicated. Most people don’t get fat in a month or so, they slowly put the pounds on each year. 5-10 pounds a year and then before you know it, your 50 pounds over weight. It’s the same thing with credit card debt.
I think it’s important to care about credit, but not let it run your life.
What would it feel like to spend less than what you make? Spending only a % of what you brought home each month and living like credit cards weren’t an option. It has become to easy to buy things without even thinking about it. Swipe and sign. Or even just clicking a buy now button online. It’s easier than ever to get into debt.
When I started www.YouWalkAway.com I thought to myself, what would happen if you stopped paying your mortgage and used that huge payment to pay down all your credit cards. What would happen to someone’s credit? I ran a couple credit analyzers online, which are typically only available to people in the real estate industry and found that if you defaulted on only one credit line, but paid off the remainder of your maxed-out credit, in some cases your score would go up. Now, that was shocking to me, but I’ve seen it first hand in a couple of cases.
My point in saying this is that you don’t have to worry that your credit will be ruined for up to 10 years. That is nothing but a scare tactic to keep you from defaulting. Will your credit be damaged? Yes. Will lenders not want to lend to you for a while? Yes. So what. Maybe it’s time to not borrow for a while and save up some cash.
Another good exercise would be to list on a sheet of paper everything you can possibly think that you would need credit for… ie. rental property, new car… etc. and decide if you will really need your credit to be good. People ask me quite often, do any of your walkaway clients have trouble getting a rental property? I thought it might be an issue, but surprisingly I have yet to hear of someone unable to find a rental.
What will I do without good credit?
Our society teaches us that debt and credit is a normal way of life. What would we do without it? Well, let’s explore this thought. Here are possibly the top 5 reasons to have good credit…
1. Well, I can’t buy a car or home without good credit!
Not True! After a quick google search about buying a car with no credit check, I found multiple sites in multiple states that offer these kind of loans. High interest rate? Sure! but the difference in a high interest rate may be a few thousand dollars over the life of the loan. Hardly a scratch into the money you may have saved from losing that catastrophic negative equity. Here is one site in Florida.
You can actually buy Aston Martins and Lamborghinis without a credit check if you were so inclined. You may have to put a whopping 15k down and $1500 a month, but it can be done. They put a tracking device on the car and if you don’t pay, they take it back.
My dad always said, son don’t buy a brand new car. As soon as you drive it off the lot, it loses thousands of dollars. So, why did I buy a new car then you may ask? Well, because it’s VERY tempting. I wouldn’t do it again though. I recently bought a used car and it looks brand new, it feels brand new, but the payment is half of what I would have paid buying the same car 4 years newer.
As far as a house goes, well there are programs for that. They may require a bigger down payment, but that’s probably a good idea anyways. If not, wait for the 3-5 years to get a new FHA loan. We will probably still be around the bottom at that time.
2. Well, I can’t get a job without good credit!
Not the case! MSN.com Says:
Some employment experts say concern about credit checks is overblown. For one thing, they say, companies typically are far more interested in other kinds of background checks, including identity verification and criminal histories. (For more information on background screening, see “Secrets a background check won’t uncover.”)
Job applicants are much more likely to lose jobs because they have a recent criminal history or they lied on an application about their identity, experience or education, said William Greenblatt, the CEO of Sterling Infosystems, a New York City background-checking firm.
Employers are more likely to use credit reports as a way to verify employment history and Social Security numbers, Greenblatt said. Lenders often verify employment when you apply for a loan or credit card, so a credit report is seen as a good way to double-check the employers listed on a job seeker’s application.
I recently had a conversation with someone high up in the military intelligence field. He obviously requires a security clearance with his job. He told me that they are more concerned about people who have lots of debts, gambling problems and maxed-out credit, due to the risk or temptation that they could be compelled to sell “secrets” or “classified information” so that they can pay off debts.
3. Well, you won’t be able to get utilities at your rental home!
A quick call to your local utility company will result in them telling you that they may need a deposit. This deposit can range from 1-12 months of the typical service on the new address. Also, this can be waived if you can show that you have paid your previous utilities on time. Also, you can typically pay that deposit over time. The power company said that you don’t need to worry that you won’t be granted power on a new rental, you just may have to go through a few more hoops. Nothing to be scared about.
4. Well, you will be denied for a cell phone contract!
Most people reading this already have a cell phone and a cell phone contract. As long as you keep paying your phone bill, nothing to worry about here. If for some reason, you need a new cell phone company, they are more than happy to help you with a pre-paid service. Once again, this is like only spending within your budget. How many of us have been alarmed when we’ve seen a cell phone bill higher than we expected it to be. That doesn’t happen with pre-paid.
5. Well, what about emergencies?
I guess that’s what that savings account is for. Right?
Your credit score will heal over time, but if you are spending all your savings to keep your overextended life afloat, then you are on a path to becoming bankrupt.
