Homeownership is a point of pride for many Fort Lauderdale residents. In addition to providing a secure place to live, owning a home can be a sound investment. However, many homeowners in Florida begin to feel anxious when they realize they owe far more on their mortgage than the property is worth. What options are available to an underwater homeowner?
When facing this situation, many homeowners choose to deliberately stop making their mortgage payments. Often called a “strategic default” or “strategic foreclosure,” this process can offer several advantages. However, this option has some drawbacks as well.
The experienced team at Loan Lawyers can talk you through the process to help you determine whether a strategic default on a mortgage might be a valuable option in your situation. Contact our team today for a free consultation to learn more about how we can assist you.
What Is Strategic Default?
A strategic default is a process where a homeowner makes a calculated decision to stop paying their mortgage to increase their chances of escaping from a financially underwater property. Making this choice has significant consequences for the homeowner. Before deciding to proceed, you should discuss other alternatives with your lawyer.
Beginning a strategic default can be the first step to engaging in other financial options, including a short sale, deed-in-lieu of foreclosure, or loan modification. To engage in these other strategies, the loan must be at least one month in arrears on their mortgage payments, or the banks will not consider these requests.
What Is the Difference Between Traditional and Strategic Foreclosure?
A traditional foreclosure occurs when a homeowner falls behind on their mortgage payments, often through no fault of their own. Maybe they lost their job or faced unexpected medical bills that made it impossible to keep up with the monthly mortgage payments. With a traditional foreclosure, the bank initiates the legal process to seize the property after the owner misses several consecutive payments.
Strategic foreclosure, also known as voluntary foreclosure, is different because the homeowner intentionally stops making payments, even if they have the means to continue to pay the mortgage. Their goal is to get the bank to foreclose so they can escape from a severely underwater mortgage. Strategic defaulters are not experiencing a sudden financial hardship but are making a calculated financial decision.
Legal Consequences of Starting Strategic Foreclosure Proceedings
Engaging in a strategic mortgage default does come with some risks that homeowners should carefully consider. The first consequence is that the foreclosure will appear on your credit report and significantly damage your credit score. When a strategic default occurs, it can make it difficult to qualify for financing in the future, whether for another mortgage, an auto loan, or a credit card.
You may also owe income taxes on any amount of your mortgage debt that the lender forgives. When a mortgage lender forgives a debt, the IRS often treats that amount as taxable income. Strategic defaulters should be prepared to pay taxes on the forgiven portion of their mortgage.
Some mortgage lenders may also file a deficiency judgment lawsuit against homeowners who strategically default. This legal action allows the lender to collect the difference between what the homeowner owes on the mortgage and what they receive by selling the home in foreclosure. However, Florida has strong homestead protections that make deficiency judgments much more challenging to obtain compared to other states.
Alternatives to Strategic Defaults
Before deciding to strategically default, a homeowner should consider alternative options that may allow them to keep their home. One possibility is refinancing into lower monthly mortgage payments. If the current interest rates are lower than they were when you originally got your mortgage, refinancing could significantly reduce your payments, making the mortgage affordable.
You can also inquire with the lender about a loan modification. A modification adjusts the terms of your loan to make the payments, interest rate, or length of the loan more manageable. The lender may be willing to work with you to modify the loan rather than foreclosing, but only if you are one month or more in arrears.
Another option is a short sale, where you sell the home yourself, and the lender agrees to accept less than the full balance owed. A short sale allows you to transition out of the home without going through foreclosure. As with a loan modification, this option may only be available if you are a month or more behind on your mortgage payments.
Pros of Starting a Strategic Default Process
Despite the risks, strategic default offers several potential advantages:
- You can escape from a severely underwater mortgage where you owe far more than the home is worth, thereby reducing your outstanding mortgage debt load.
- You avoid wasting more money paying down a mortgage that exceeds the property value.
- Banks may be more willing to negotiate because you intentionally started the process.
- Florida’s homestead protections limit the impact of deficiency judgments in some cases.
- Strategic default allows you to access options like short sale and deed-in-lieu of foreclosure.
Contact Our Fort Lauderdale Strategic Foreclosure Lawyers for Help
Finding yourself in the untenable position of owing more than your property is worth can feel frustrating and overwhelming. You have held up your end of the bargain and been punctual with your mortgage payments, but your lender is unwilling to let you make the necessary changes to feel in control of your situation. You do not need to accept this state of affairs, though. You have options — and Loan Lawyers is ready to help.
Our experienced Fort Lauderdale foreclosure defense lawyers have a thorough knowledge of how the foreclosure process works in Florida. If you are considering executing a strategic default to assist with negative equity, our Florida foreclosure lawyers will listen to your story and inform you of your rights and options for a brighter future. Because we have a proven track record of successful outcomes for our clients, working with our Florida foreclosure defense lawyers can give you the peace of mind you deserve.
Contact our team today for a free consultation to learn more about how we can support and advocate for you.
