Foreclosure & Alternatives Law
Foreclosure & Strategic Default (Walking Away)
While our parents and grandparents may never have considered walking away from a home mortgage, it's a new world in American real estate. After questionable (even criminal) moves by financial institutions, deciding whether a foreclosure is the right move is more complicated now.
Depending on your given situation, a strategic default (or walking away from a home) and going into foreclosure has increased in popularity. Since 2008, the playing field has shifted. Indeed, the goalposts and relative rules of the game seem to have changed.
Some borrowers have pursued strategically defaulting on a mortgage loan once the home has become a bad investment (or “under water”). This differs from the traditional notion of a foreclosure. Previously, foreclosures typically only occurred when a homeowner can no longer afford the mortgage payments.
As properties became so far underwater (where you owe more than your home is worth), borrowers purposefully choose to stop making payments. This is not a decision to enter into lightly. With a strategic default, the borrower does the math and makes a business decision to voluntarily stop making payments. Once they voluntarily stop making payments, the lender is forced to foreclose.
There are litany of issues that may occur after such a move, including a significant credit score drop, inability to get a new loan, etc.
Before making an important decision such as foreclosing on your home, you should first do your due diligence. You should know very clearly what your home is worth, preferably from multiple real estate experts.
Further, without tipping your hand, you should contact your lender to explore all your options. The financial company holding your loan may not be keen on going through a foreclosure — depending on your specific housing market. If there are viable options for your given situation, a lender may pursue alternative option or be willing to work with you, rather than go down the road of a foreclosure.
But what if you simply can't make mortgage payments anymore? The following is a checklist of things to consider before you decide to foreclose on your home.
- Talk to your Lender: Once you notice you are behind with your payments, talk to your lender about your inability to pay as soon as you can. Depending on the specifics of your situation, your lender may be able to work out financial arrangements and other alternatives such as repayment plans and mortgage modification
- Contact a HUD Counseling Agency: contacting an agency regarding counseling programs is a good way to keep you informed. Government agencies, private and community organizations can help you
- Consider a Short Sale: Short sales are when you try to sell your home before it goes into foreclosure. The bank accepts the sale price even if it’s less than your mortgage. If the bank doesn’t accept the sale price, the lender will enter into a deficiency judgment which makes you pay the “deficient” amount you still owe the bank.
- Deed in Lieu of Foreclosure: This is generally not as damaging to your credit as a foreclosure would be. If you qualify, a bank will give you back your property – deed in lieu of foreclosing. This process is sometimes unavailable, so you must qualify beforehand.
- Work with a Foreclosure Attorney: stay informed by contacting a foreclosure attorney near you.
Only each individual homeowner can decide whether pursuing a strategic default is right for them. As a homeowner, you may want to avoid foreclosure and keep your home. If so, this checklist can help guide you.