When most people think of foreclosure, they think of situations in which homeowners can no longer afford to make their mortgage payments. However, this is not the only scenario that can lead to foreclosure. Sometimes, a home is so far underwater that it simply doesn’t make financial sense for the homeowner to continue making mortgage payments on it. Instead, they voluntarily default and allow the lender to foreclose. This is known as a strategic default.
If you have considered strategic default, it’s important to not only consider the amount of debt left on your mortgage but many other factors too. While a strategic default may help you financially in the short-term, there are a lot of long-term consequences to think about.
A Closer Look at Strategic Default
Many people think a strategic default is simply walking away from your home. This, however, isn’t entirely true. When a person cannot afford to make their mortgage payments and a lender starts the foreclosure process, the homeowner may choose to simply walk away from the home. That is, they decide not to fight the foreclosure lawsuit in court.
A strategic default is slightly different. In these situations, the homeowner defaults on the home even though they can afford to remain current with mortgage payments. It’s not that they can’t pay for the home – it’s that they simply don’t want to because it no longer makes sense to do so.
Although strategic default often sounds good to homeowners that know they’ll end up paying the lender more than their home is worth, there is a lot to think about. The consequences of a strategic default will be felt for a long time to come.
You May Have a Deficiency Judgment Issued Against You
In some foreclosure cases, after you or your lender sell the home, there are not enough proceeds from the sale to cover the amount of your debt. This is particularly true when your home is already underwater at the time you decide to strategically default. When this is the case, the lender can ask the court to file a deficiency judgment against you. If the judge grants this request, you are then liable for paying the balance of the debt still remaining.
This is an important consideration, particularly for those who are weighing their financial options. If you have a deficiency judgment issued against you, you may still owe the lender thousands of dollars. Due to this, a strategic default may not make as much financial sense as you thought.
It’s Difficult to Get Another Loan
Fannie Mae has started to crack down on strategic defaulters. This agency has stated they will no longer provide government-backed mortgages to those who have strategically defaulted for seven years after the date of foreclosure. They have also stated that in states such as Florida that allow for deficiency judgments, they will also take legal action to recover outstanding mortgage debt from borrowers. This means that not only might the lender sue you for the remaining debt on your mortgage, but the government might, too.
It Will Hurt Your Credit Score
A foreclosure will not completely destroy your credit, and any damage done to it is only temporary. However, after a strategic default there will still be a significant amount of time when your credit score is lower than it was before the foreclosure. This will not only prevent you from getting a new mortgage as fast as you would like, but it can also keep you from obtaining a car loan, a line of credit, or even a credit card.
You May Not Find Housing Right Away
Of course, if you’re planning on strategically defaulting, you know you’re going to lose your home. Too many homeowners, though, when considering a strategic default, take for granted the fact that they’ll find another home right away. They may be aware that they’ll need to rent for a little while, but they think that, too, is relatively easy. After you have allowed the bank to foreclose on your home, it’s not so simple.
Landlords and property management companies will check your credit score almost every single time you submit a rental application. When they see that you have defaulted on payments for your housing before, they are far less likely inclined to rent to you. This could mean that you may not have anywhere to live, which is a fact many people overlook when they are weighing the pros and cons of strategic defaults.
There Is a Stigma to Foreclosure
Even in a state like Florida, which has been hardest hit with foreclosures over the past decade, there is still a stigma attached to those who have lost their homes to foreclosure. Like landlords, employers these days typically run credit checks on potential employers. When they see a foreclosure on your credit report, it does not tell them that it was a strategic default. It simply looks like you stopped paying your mortgage and lost your home because of it.
This is especially important for those that work in the financial sector. Workers in industries such as banking or securities are expected to have exemplary credit scores. If you don’t, it could prevent you from getting a job in your field. That will likely be the case until the foreclosure comes off your credit report, which is a process that takes several years.
Call Our Florida Foreclosure Defense Attorneys to Learn About Alternatives to Strategic Default
If you’ve done the math and have determined it simply no longer makes sense to continue making mortgage payments on your home, call our Fort Lauderdale foreclosure defense attorneys. At Loan Lawyers, we can advise on the many options you have including a short sale, a deed-in-lieu of foreclosure, or a loan modification. These can all prevent foreclosure from occurring, which will, in turn, help you avoid all the consequences that come with it. Call us today at (954) 523-HELP (4357) or contact us online to set up your free consultation.
Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation to see how we may be able to help you.