Should I Consider a Strategic Default on My Mortgage?

 Posted on December 02, 2019 in Foreclosure

While the housing market has largely recovered from its most recent serious crash, many families still worry about money and how they will afford their mortgage payment every month. In some situations, money is always pretty tight, and in others, a serious accident or illness may upset the family’s financial stability. If you are struggling to pay your mortgage, you might have had someone suggest a “strategic default” as an option for you. Before you take any action, however, it is important to know what a strategic default is and what the consequences could be.

What Is a Strategic Default?

A strategic default refers to a situation in which a borrower intentionally allows his or her loan to default. The borrower deliberately falls behind on the loan as a financial strategy, not because he or she could not afford the payments. Strategic defaults are most often used when there is negative equity in the property in question. Negative equity means that the property is valued at less than the amount remaining on the mortgage loan.

Keep in mind that a strategic default is not the same thing as a consent foreclosure, though many people use the terms interchangeably. A strategic default applies to the status of the loan itself, while a consent foreclosure refers to one possible outcome of defaulting on your loan. It is possible—and it may even be your best option—to strategically default on your loan first, and then work out a consent foreclosure agreement with your lender.

Getting Your Lender’s Attention

While it might seem wrong to intentionally skip your mortgage payments, doing so may be the only way to get the financial help you need. Most mortgage lenders claim to offer assistance options to borrowers who are in danger of falling behind, and to be fair, many lenders do make help available. Lenders, however, are looking out for themselves, and it is usually in the institution’s best interests for you to continue making full payments for as long as possible.

Once your loan defaults, things tend to change quickly. A default usually opens the door to a variety of other options with the lender, including the possibility of a loan modification, a short sale, or a deed in lieu of foreclosure. The lender’s goal is to get you back on track with regular payments—even if they are lower than before—and to avoid the expenses and hassle associated with foreclosure. With this mind, a strategic default might seem attractive.

Potential Drawbacks

There are certain risks associated with strategic defaults as well. First, and most importantly, your lender is only obligated to abide by the terms and conditions of your loan agreement. This means that rehabilitation options might not be available, even after a default. You should also keep in mind that a strategic default will almost certainly have a negative effect on your credit rating. If you are planning to take out new loans in the near future, a strategic default could affect your eligibility and your interest rates.

Call a Lake County Foreclosure Defense Attorney

If you are considering a strategic default on your mortgage loan, an experienced Libertyville foreclosure lawyer to discuss the potential benefits and risks. Call 847-549-0000 to schedule a free phone consultation at Newland & Newland, L.L.P. today.

Sources:

https://www.investopedia.com/terms/s/strategic-default.asp

https://www.bankrate.com/finance/mortgages/risks-of-walking-away-from-mortgage-debt-1.aspx