Strategic foreclosures occur when homeowners walk away from their homes despite being able to pay their mortgage, often due to the home losing value or being unable to sell. This decision can have negative effects on their financial future and credit.
Strategic foreclosures are slightly different from standard foreclosures, in which a person loses their home due to an inability to pay the mortgage. In this type, the homeowner walks away from the home on purpose, stopping mortgage payments despite the fact that he or she can pay financially. This is often done because a house loses value or you can’t sell it. Although strategic foreclosures are often based on the premise that it will be a financially sound option in the long run, this decision can have catastrophic effects on a person’s financial future.
When a homeowner makes the decision to default on their mortgage in order to lose their home on purpose, it is known as a strategic foreclosure. Depending on the type of mortgage and local laws, a person can skip mortgage payments for three to six months before going into foreclosure. From this point on, he or she can stay in the home for several months or a year after it goes into foreclosure before the lender repossesses the home.
There are several reasons why people decide to enter into strategic foreclosures. The most common reason is when a house loses a significant portion of its value. Often when a person’s home is appraised for less than the remaining mortgage, making monthly mortgage payments can seem pointless. This is especially common when a person does not intend to stay in the home for as long as it would take to pay off the mortgage, and will end up owing money to the lender when the home is later sold. Getting away from home, and potentially paying off debt, is a common reason people enter into strategic foreclosures.
Occasionally, a person may enter a strategic foreclosure if they no longer live in the home but are having trouble selling it. Instead of making the monthly mortgage payments he or she can afford, he or she may decide to simply get out of debt and put that mortgage payment toward living expenses or savings. This usually occurs when owners are unable or unwilling to rent a home they no longer live in.
The vast majority of people who deliberately lose their home do so because they believe it will make more financial sense in the long run. Depending on the laws in the jurisdiction in which a person lives, a foreclosure may be forgiven, although it will likely remain on your credit report for a certain period of time. If this is the law in a person’s area, the only real argument against strategic foreclosures is a moral one: a person must decide if failing to comply with a legal agreement is worth the future financial benefit. Despite this, in most jurisdictions, it is possible for a lender to require that a person who has moved away from their home still pay some or all of the remaining mortgage. This, coupled with the serious detrimental effects that strategic foreclosures can have on people’s credit and therefore ability to make large purchases or lend money in the future, can make this type of foreclosure less how strategic
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