If you owe more on your mortgage loan than your home is worth, you’re not alone. Many homeowners in Florida make monthly mortgage payments for properties with little to no equity. Some homeowners in this situation intentionally stop making their mortgage payments. This tactic is called a “strategic foreclosure.” It may be a viable solution for you if you’re underwater on your mortgage.
To learn more about strategic foreclosure and whether it’s right for you, contact the strategic foreclosure attorneys at Loan Lawyers for your free initial consultation.
What Is Strategic Foreclosure?
Sometimes changes in property values and interest rates result in a borrower owing more on their mortgage than their home is worth. When this occurs, the mortgage is known as “underwater” or “upside down.”
If a borrower is significantly underwater on their mortgage, they may waste money on a bad investment for years. In some cases, borrowers may simply choose to stop making their mortgage payments instead. This choice is known as a “strategic default,” also called “strategic foreclosure,” “voluntary foreclosure,” or “walking away” from a home.
Importantly, a strategic foreclosure is typically not the last resort of a borrower who cannot afford their mortgage. Most borrowers who walk away are acting strategically. Beyond a certain point, paying for an underwater home may just be a bad financial decision. After doing the math, these borrowers just stop making payments, even if they have the means to do so.
Pros and Cons of Strategic Defaults in Florida
As with most choices, there are pros and cons to deciding on a strategic foreclosure. It’s a form of damage control that reduces the amount of money you lose on the home. If your home’s value is unlikely to recover in the near future, a strategic foreclosure allows you to cut your losses.
However, a strategic default may also involve one or more of the following downsides:
- A deficiency judgment – If the amount of money you owe on your house is greater than the foreclosure sale price, the difference between those two values is known as a “deficiency.” In Florida, your lender has the right to file for a “deficiency judgment.” This allows them to collect the remainder of the money you owe on your mortgage. They can legally collect by garnishing your wages or taking funds directly from your bank account.
- Difficulty getting another mortgage – Foreclosing on a home, whether strategic or not, could make it more difficult to get a new mortgage in the future. For example, you are ineligible for a Fannie Mae-backed mortgage loan for seven years after a strategic default.
- Negative impacts on your credit – A strategic foreclosure will significantly impact your credit score for seven years. You can heal your credit score over time, but a considerable drop could make it more difficult to qualify for mortgage and non-mortgage loans, rental agreements, and good interest rates.
- Issues with future job applications – Some employers run credit checks as a standard onboarding procedure, meaning a foreclosure on your credit report could affect your ability to find work. This will depend on the reason for the foreclosure and the employer’s attitude. For example, employers in the financial services industry would probably be more concerned with a poor credit report than employers in the construction industry.
What Are the Alternatives to Strategic Foreclosure in Florida?
Going through with a strategic default on your mortgage loan is a big decision with potential consequences that could last for years.
Before you commit to a strategic foreclosure, it’s a good idea to learn about the possible alternatives, such as the following:
- Negotiating a short sale – Making a “short sale” involves selling your home for less than the remaining amount you owe on your mortgage loan instead of foreclosing and having the bank sell the home instead. You can then use the money you make from the short sale to pay off a chunk of your loan balance.
- Offering a deed instead of foreclosure – A “deed instead of foreclosure” is when you offer your lender the deed to your house. If your lender accepts the deed, you can typically forgo the remainder of your mortgage payments and avoid foreclosure.
- Modifying or refinancing your loan – If you’re making payments on a high-interest mortgage loan, it can take much longer to pay down your principal balance and build equity. Your loan servicer may agree to modify or refinance the loan to give you a better interest rate. This could make your loan payments more affordable, allow you to increase your equity, and ultimately make your home a worthwhile investment. However, note that many lenders may refuse to refinance your loan if you don’t already have some equity in your home.
Keep in mind that both a short sale and a deed instead of foreclosure will negatively affect your credit, though not to the extent that a foreclosure will. Your lender can also still file for a deficiency judgment if you still owe money on your mortgage loan.
What Happens When I Walk Away From My Mortgage?
In short, it depends. If you still owe your lender, they may file a deficiency judgment against you. If the lender chooses to forgive the deficiency, you may end up paying income tax on the amount of debt your lender canceled.
Regardless of the consequences, a strategic foreclosure is sometimes the best option financially. An experienced Florida foreclosure defense lawyer can help you evaluate your available options and make an informed, fact-based decision.
Considering Strategic Foreclosure? Contact Our Florida Foreclosure Lawyers Today
If you are struggling to pay your mortgage or simply owe more than your home is worth, you need advice from the Fort Lauderdale foreclosure defense lawyers of Loan Lawyers. Contact us and speak with one of our qualified attorneys to discuss your situation and ask any questions you have about the strategic foreclosure process.
