About a month ago (give or take four weeks because I’m bad at counting), I wrote a nice post on what happens when you get foreclosed upon. If you’re mere moments from your house being taken away, I suggest you read that and then lament your lack of planning skillz. Get on it, you don’t have much time.
One of the things I talked about was the difference between mortgages in Alberta and the rest of Canuckistan. What? That’s what I call it ever since the Syrians showed up.
The big difference is Alberta has non-recourse loans, while the rest of Canada’s mortgages are recourse. So in Alberta, all the lender can do to recover their debt is to sell the place, while in the rest of Canada they can go after you personally if selling the place isn’t enough to pay off the loan. Note that if you had CMHC or Genworth mortgage insurance attached to the loan, they’d be on the hook for any shortfall, not you.
This prompted a comment from Chris, a regular reader of the blog who isn’t related to me. THEY EXIST, THANK YOU VERY MUCH. Chris asked what’s stopping someone from Alberta from just walking away from a mortgage on a house that’s massively underwater.
The answer is not much. The bank can and will foreclose on them, screwing their credit in the process. Any judgment will show up on your credit, and it will cause the score to go down. The amount is also recorded on your credit, and I don’t need access to the secret formula from Equifax to know a bigger judgement will bring your score down more. That’s just common sense.
Like a bankruptcy, a judgement stays on your credit for seven years. So assume if you walked away from a house, you’d be up shit’s creek when it came to credit for the same number of years as breaking a mirror.
Man, mirrors have some harsh magic powers. They should use those powers for good, like improving how I look without a shirt.
This whole exercise got me thinking. Say it’s two years from now and you’re sitting on a house that’s underwater in Alberta. You’d really like to leave for a place where you can actually get a job. And you can’t sell because the bank won’t let you get out of the mortgage without having the funds to pay it off.
How much underwater would it have to be before you’d say screw it and mail the keys back, taking the massive hit to your credit?
What’s your credit worth?
Essentially, the situation is just asking you one question. What’s your credit worth?
If you’re planning on borrowing a lot of money, credit is probably pretty valuable to you. If you owe student loans or credit card debt, it’s obvious your credit is valuable now. Have you seen the rates dirtbags borrow at? They start with 1s, 2s, and 3s, and then there’s a number behind that. AND THEN THE DECIMAL. And then another number. Lenders are precise, if anything.
But what if you owed nothing with no plans to borrow again for a long-ass time?
For that person, credit doesn’t really affect their lives in a big way. They really only need it for:
- Getting new insurance
- Switching cell phone providers
- Signing up for a new credit card
- Borrowing to buy a car
- Credit check on renting a place
Many of these pitfalls can be easily avoided. I’ve been renting for almost three years after selling my house, and not one of my landlords required a credit check. I did get my credit pulled when I switched auto insurance carriers a few months ago, but I can’t imagine it being more than a couple hundred bucks per year more for someone with crummy credit. Switching cell phone carriers and credit cards are easily avoided. You could go prepaid for each pretty easily if forced to.
The fact is there are millions of Canadians who are living without credit, either by choice or by force. As much as I think you should avoid amateur landlords who are the most likely to not check your credit, it’s really easy to find one to rent you a place. They’re the ones with the typos in their ads. It’s easy to avoid needing credit for those other things too.
Plenty of people already avoid having credit cards. According to Bankrate (a U.S. site, so Canadian numbers might be different) a full 63% of millennials don’t even have a credit card. Even 35% of people older than 30 go without a credit card. So I’m pretty sure you can live life without one.
This brings us back to the question of what your credit is worth. How far underwater would you have to be in order to screw your credit?
Personally, I’d consider doing it for as little as $20,000. I probably wouldn’t because I’ve been in the banker’s shoes before and have a little sympathy for his plight. But I can certainly see the logic in doing it.
Let me turn it over to you guys. At what point would you screw over your credit? Would the dollar amount be the important factor or would you be more focused on getting a fresh start somewhere else? The comment section awaits.