\”Strategic foreclosure\” is a phrase that\’s been circulating throughout real estate and mortgage publications and networking groups. It refers to a strategy where homeowners intentionally withhold mortgage payments in attempt to force lenders into negotiating their mortgage note.

Strategic foreclosure has been used in the past by real estate investors and mortgagors that could afford to rebound from the financial fallout. This strategy is typically used when property values have severely declined and borrowers have exemplary credit ratings that can survive a loss of 100 points or more.

Today, homeowners are beginning to explore strategic default because they are desperate to be relieved of underwater mortgages. Lenders normally won\’t offer payment reduction alternatives to homeowners just because their property value has decreased. Instead, mortgagors are forced to take drastic action, such as not paying loan installments, to get the attention of their lender.

Several real estate investors I personally know intentionally default on payments to force their bank into reducing the principal balance, or offer deed in lieu of foreclosure or short sale approval. This is a very risky move that could result in foreclosure, so any person that elects this method should carefully weigh the consequences.

Foreclosure severely impacts credit ratings that can be devastating for people with average to low FICO scores. Anybody who has taken part in credit repair will confirm bettering credit scores is a slow and painful process. Having poor credit makes if next to impossible to obtain almost any kind of credit and nearly always prohibits people from qualifying for a mortgage loan for several years.

Financial institutions base interest rates on credit scores. Consumers that have low scores pay higher rates of interest than consumers possessing excellent credit scores. Anytime foreclosure is recorded to credit reporting agencies, FICO scores can decline by 100 points or more. That much reduction usually pushes people into a lower credit bracket.

Numerous things can be impacted by declining credit scores. Credit card providers usually decrease credit limits and increase interest rates. Insurance companies can increase premiums. Landlords are leery of renting to people with bad credit and usually require a large security deposit, along with first and last month rent.

In addition to credit damage, a lot of banks hold homeowners financially accountable for deficiency amounts caused by foreclosure. For example, if a homeowner strategically defaulted on a loan with an outstanding balance of $150,000 and the bank sells the property for $120,000, the homeowner would be responsible for $30,000.

If the homeowner is incapable of paying the deficiency, banks can file a lawsuit and obtain a court ordered deficiency judgment. Judgments are reported to credit bureaus and cause further decline in credit scores. Banks can engage in wage garnishment to collect the outstanding debt.

At the very least, the judgment remains on credit reports for up to a decade after the debt is fully paid. Creditor judgments wreak havoc on credit reports that can take years to recover from. Not to mention, it takes most people several years to pay deficiencies on property they no longer own.

In addition to credit damage and the potential of owing banks a lot of money after foreclosure takes place, there is also the element of morals. While it can make good financial sense to enact strategic default, many individuals feel a moral responsibility to fulfill their promise to repay home loans. They understood there were risks involved when they financed the property and are willing to stand true to their word.

Each and every person will need to determine if strategic foreclosure is something they can live with. If banks rule in their favor, homeowners could obtain much-needed mortgage relief. If banks call their bluff, they could lose their home, ruin their credit, and end up owing the bank a lot of money.

Author Bio: Simon Volkov is a real estate investor that specializes in buying foreclosure properties in California, Nevada, and Washington. He offers an expansive foreclosure article library covering topics of strategic foreclosure and foreclosure prevention at www.SimonVolkov.com.

Category: Real Estate
Keywords: strategic foreclosure, strategic default, voluntary default, short sale approval, foreclosure