If your home is underwater (worth less than what you owe on it), and you've tried and failed to modify the terms of your loan or come to another agreement with your lender, you may be wondering if it's wise to continue making payments on the property. Is there a way out?
Some homeowners who are deeply underwater choose strategic default over paying for a property that has lost significant value. It's defaulting because payments on the loan stop, and it's strategic because the homeowner is choosing to spend their money elsewhere and allowing foreclosure to happen.
Is strategic default right for you?
If you're considering a strategic default, the most important point to understand is that you will be allowing foreclosure to happen. You will lose your home and will have to find other housing.
The primary reason for strategic default is that the homeowner owes more on the mortgage than the home is worth, and they have been unable to negotiate better terms. Strategic default should only be considered if all other avenues, such as getting a loan modification, have been exhausted.
Homeowners can be denied loan modifications because they make too much money, leaving them stuck with a home in negative equity. If you've not experienced a hardship, but want your mortgage to reflect the actual value of your home instead of the inflated value from during the housing bubble, your lender may not be very receptive. They see that you can afford your mortgage payment and they want you to pay it, even if if the valuation is completely unfair. Some homeowners refuse to spend their money repaying a loan for twice the value of their home, so they simply stop and go into default.
What are the benefits of strategic default?
Once you have stopped paying your mortgage, you can have anywhere from months to years before your home is sold and you are forced to leave. You need as much time as possible to save the money you would have been spending on mortgage payments to:
- Save for a security deposit for an apartment
- Pay down other debt
- Increase your savings
You can also take advantage of your still-good credit by locking in terms for credit cards, car loans, or even another mortgage on a more affordable home. Defaulting will negatively impact your credit rating, so it's best to “make hay while the sun is shining.”
Fortunately, there are reasons your lender will want to work with you, even as they foreclose on you. It takes time for the lender to foreclose on a property, put it on the market, and sell it. They would prefer that the home is occupied and maintained during this process. If it's not occupied, vandals may come in and damage the home, the lawn doesn't get cut, and utilities don't get paid. To keep the home occupied and maintained, the lender may give the defaulting homeowner more time in the home than the legally required minimum just to have someone living there keeping the lights on.
Is it ethical to walk away from your home?
No one wants to default and contribute to driving their neighbors' home prices down even further, but each family has to look out for their own financial interests first. It's unlikely that a single home foreclosure could be blamed for causing a significant drop in an area's home values. Many factors beyond the control of the individual homeowner contribute to housing prices. What about the lender?
A mortgage is a business contract that says the borrower will repay the loan to the lender, or else the lender can foreclose. So, it's perfectly ethical for a borrower to stop paying and for the lender to repossess the home. In fact, businesses choose to default all the time.
Remember that the amount of money your home sells for at a foreclosure auction will not be enough to pay off your loan. The lender may sue, get a deficiency judgment, and come after your assets. This makes it all the more important that you plan ahead and save money.
So, you might be wondering, why anyone would need an attorney to walk away from their home? It doesn't take any legal knowledge not to pay your mortgage, right?
While it's not hard to walk away, planning your exit from your home is important so you can have as much time as possible to plan, save money, and negotiate. A foreclosure defense law firm can help you decide if other options, that do not involve foreclosure, are available to you.
A deed-in-lieu of foreclosure allows you to hand your home over to the lender and avoid foreclosure. Or, a short sale, where the lender allows the property to be sold for less than what is owed on the mortgage, may be possible. Both options are preferable to a strategic default.
If none of the best options are possible, a foreclosure defense attorney can still be helpful. An attorney can prolong the foreclosure process by submitting a loan modification application even if keeping your home is not your ultimate goal, which can give you more time in your home to save money and get your affairs in order.
So, it's not as simple as walking away, saying goodbye to your mortgage payment, and starting over. You can leave your house, but you may continue to have financial obligations related to it.
Above all, the decision to strategically default or not should be made soberly, based on the numbers and facts, and not on emotion. An experienced foreclosure defense law firm can assist you in determining what the best choice is and how to make it happen.
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