Strategic Default--Is It An Option For You?

What is strategic default? 

If you own a house that is now worth far less than what you paid for it, you may consider walking away from your house and mortgage payments. This may be an option for you even if you are presently able to make your mortgage payments and if you are current on your mortgage payments. Some homeowners are starting to consider this option as part of their financial planning.  They have decided to "strategically default" on their mortgage.

Just like banks who make financial decisions on criteria for lending, homeowners can make a financial or business decision on when and if to strategically default on their home mortgages.  Many experts indicate that if a home value dips below 65 to 75% of the balance due on the mortgage, homeowners begin to consider walking away from the home, even if he or she can make the mortgage payments.

The primary reason is the amount of time required for the home value to return to the amount due on the mortgage.  The amount of time may be over three (3) to four (4) years and the homeowner may have other factors to consider during that time:

• Will they plan to retire during the next few years?
• Will funds be required to finance college?
• Is there a plan to move from the area?
• Will funds be required for other necessities?
• Is the home big enough for the next few years for a growing family?

It is reported that 4.5 Million Homeowners are Underwater

Numbers of underwater homeowners who owe more on their mortgage than the value of their home is upwards of 4.5 million homeowners according to many estimates.  Many of those homeowners can no longer make their mortgage payments.  Many of those homeowners may consider strategic default even if they can afford their mortgage payments because of other factors in their lives.

Considerations for Strategic Default 

    Short Sales Not Really an Option: Lenders are no longer really considering short sales in many hard hit areas.  Homeowners may wish to pursue short sales, but they are not so easy to do right now.  Lenders are not making the process easy to attain, and are not approving many short sales in Maryland, especially in Baltimore County, Prince Georges County, Montgomery County and Frederick County.  Banks are not approving short sales at the levels required to sell the home at current values.  The value of the homes throughout Maryland has dipped substantially below the amount paid for the homes in the last few years. 

    Strategic Default as Business Decision? Homeowners are encouraged to consider walking away from their home as a business decision--just as the banks did when they approved the mortgage loan.  Many homeowners feel a moral obligation to keep paying their mortgage.  In these financial times where home values have sunk to new lows, experts are helping homeowners to make the decision to leave their home and loans behind.  If you won't have a chance to recover your home value in the next 3-4 or even 5 to 10 years, leaving your loan behind and making the decision to default on the loan is one option.  You will want to consult with your Baltimore Bankruptcy Attorney about your options and effect on your credit prior to making this decision.  

    Rent Payments Far Below Mortgage Payments.  Homeowners are weighing the amount of rent payments available in areas they want to move to---versus being stuck in their current home and continuing to pay the mortgage.  Opting to pay rent in more favorable area, either for larger home or apartment, or for better school district are considerations for many homeowners.  Many homeowners have moved out of areas where numerous foreclosures are taking place because these areas are not maintained as well as they were in the past, the neighborhood is unsuitable to raise a growing family or they are facing retirement or new job and need to relocate.  Whatever the reason, choosing  to pay half the amount for a more favorable rental over paying double the amount for mortgage is now an option for many homeowners. 

    Other Debt Can Become Part of Bankruptcy and Discharge   These homeowners are choosing to strategically default on their home loans and their other debt, including credit cards etc.  They may choose to pay far less for rent in a new area or new state, allowing them to relocate for retirement or new jobs.  Bankruptcy and either a chapter 7 or chapter 13 filing can become part of the overall plan after a strategic default.  

    Repair Your Credit After Bankruptcy  Look into options for credit repair after bankruptcy. Many experts find that after bankruptcy or foreclosure, credit scores can recover within two years, if other debt is repaid, or the homeowner obtains a discharge from all debt through bankruptcy.  Obtaining a rental can be done prior to foreclosure or even after.  The amount of the deposit may increase if foreclosure has taken place. You may qualify for a rental if you apply prior to foreclosure taking place.  Consult with your Maryland Bankruptcy Attorney to consider all of your options. 

For more information, see full article from DailyFinance: http://srph.it/9b3TZm