1. What is a Strategic Default?
A Strategic Default is a calculated decision by a borrower/mortgagor to stop making payments on their mortgage, even though they may be financially capable of doing so, in order to sever themselves from further repayment obligations on a home that is presently worth significantly less than it was at the time of obtaining the mortgage. There is nothing illegal or morally wrong with pursuing this course of action because the Strategic Default is effectuated in accordance with the terms of the loan. What happens is, the borrower/mortgagor notifies the lender of their intent to surrender the collateralized property, which has the effect of putting the ball back in the lender’s court to sell the home and satisfy the balance of the loan.
2. Is there a difference between a Strategic Default and merely walking away?
Yes, there is a difference between the two because the decision to Strategically Default is only available to a class of borrowers who have an ability to pay their mortgages, but may not want to consider doing so because of the financial imprudence of continuing to make payments on an insolvent property.
On the other hand, when a borrower simply stops paying the mortgage their home because of an inability to pay their mortgage, this is known as walking away. This alternative, although less favorable than other mortgage foreclosure defense tactics, can be a viable means of escaping an underwater property and taking a step towards gaining financial stability.
3. Is this something I can do on my own?
A Strategic Default or walking away are things a homeowner can do on their own, however, as often is the case, homeowners are unprepared to deal with voluminous amounts of paperwork and due diligence associated with surrendering their home to their lender. If financially capable of doing so, it is advisable to have a foreclosure attorney walk you through the procedure.
4. What results will I see from hiring a professional to negotiate on my behalf?
A competent attorney or other foreclosure specialist will show you how to continue to live in your home without paying your mortgage for 6-8 months, or more, during the pendency of the process. Creditors will be directed to cease all communications with you. You will learn about bankruptcy and how to avoid it. And lastly, your attorney or other foreclosure specialist should show you how to insulate your credit as best as possible and then educate you on how to repair it as quickly as possible.
5. After Strategically Defaulting, what if my home does not sell for as much as I owe?
The answer to that question depends on where the property is located. Eight states have non-recourse statutes which prohibit the lender from pursuing a deficiency judgment against other assets of the debtor. In Florida, however, lenders can pursue other property subject to Florida jurisdiction in order to satisfy the deficiency judgment.
6. Should I declare bankruptcy at the time of making my Strategic Default?
Declaring bankruptcy should be a last resort in remedying financial distress. Encompassed within bankruptcy is a bundle of debt, which includes both secured and unsecured debt such as mortgages, auto loans, credit card debt, and other unsecured loan obligations. If at all possible, you should seek to avoid bankruptcy because in doing so your credit will suffer in all aspects; whereas with a Strategic Default, your other avenues of credit will not be cut off as they would be by declaring bankruptcy.
Depending on the circumstances of your foreclosure, lenders are now requiring two to five years of good credit history from the date of the discharge of the foreclosure before extending a borrower a line of credit. If there were extenuating circumstances or hardship that caused the foreclosure, lenders may only require three years. What is more, if you are able to place a large down payment, banks may be willing to offer a mortgage in as little as one to two years. But for the average debtor, the expected wait should be around five years.
8. How long will the foreclosure stay on my credit score?
Lenders will look back as far as 7.5 years in their analysis of deciding whether to make a loan. A foreclosure will remain on your credit for seven years, but the adverse consequences will gradually diminish with each passing year.
9. What are the tax consequences of either a Short Sale or a Foreclosure?
Disclaimer: You should always consult a competent tax professional with tax question.
That said, typically, the tax liability on a short sale and a foreclosure are the same. If the bank does not write the deficiency off on their own tax filing, and the debtor is not covered by the Mortgage Forgiveness Debt Relief Act, the borrower could be liable for both state and federal income taxes.
The Mortgage Forgiveness Debt Relief Act provides relief from federal taxes on the difference between the debt obligation and the home’s sale price for borrowers whose principal place of residence is the subject of the foreclosure, and who have never extracted the equity of their home through refinancing.