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.
Strategic Default ("Walking Away")
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.
The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.
Additional Foreclosure and Alternatives Articles
- A Homeowner's Rights During Foreclosure
- How To Avoid Foreclosure
- The Mortgage Forgiveness Debt Relief Act of 2007
- Can I Use a Loan Modification Program in Order to Save my Home from Foreclosure?
- Renters Now Protected in Foreclosures
- What are Credit Counseling Agencies?
- Foreclosure Protection for Victims of Hurricane Sandy
- Different Types of Foreclosure
- How Can a Creditor Repossess Property?
- The Foreclosure Timeline
- Defenses to Repossession
- Understanding the Foreclosure Process
- A Plain Language Explanation of Your Options for Avoiding Foreclosure
- Alternatives to Foreclosure
- What to do About Your Mortgage When You're Facing Money Problems
- Bankruptcy or Foreclosure?
- Ten Tips for Avoiding Foreclosure
- Foreclosure Laws in Hawaii
- Foreclosure: An Overview
- How do creditors get paid when foreclosing on a house to satisfy unpaid debts?
- What is acceleration?
- I've fallen on bad times and am having trouble paying my mortgage. What should I do?
- Who is eligible for a short sale under the Making Home Affordable Foreclosure Alternatives Program?
- What can a creditor do if a debtor won't pay?
- What is the Hope for Homeowner's Act?
- What is the Truth In Lending Act?
- What Is a money judgment?
- I'm in foreclosure... can refinancing under FHASecure still help me?
- What is the FHASecure refinancing program?
- Are homeowners with interest only mortgages eligible for an FHASecure refinance?
- What are the requirements for an FHA Streamlined Mortgage Refinance?
- What kinds of streamline refinances do lenders offer?
- What is Judicial Foreclosure?
- What is a Power of Sale Foreclosure?
- What is Strict Foreclosure?
State Foreclosure and Alternatives Articles
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina