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When to Walk Away From a Mortgage

Miami foreclosure defense
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Sometimes, a situation arises when it makes sense for a homeowner to walk away from his home and his mortgage. The technical term for this process is a strategic default, and it involves consciously deciding to stop mortgage payments. While this action comes saddled with certain risks, there are some benefits to be had from walking away.

The Benefit to Walking Away

Underwater homes, those in which the homeowner owes more than the property is actually worth, are becoming increasingly prevalent. Understandably so, it can be frustrating for a homeowner to continue paying for what now constitutes a bad investment. A strategic default is  one of a number of alternatives for getting out of this scenario, so that the person paying the mortgage no longer has to funnel his money into a property that is not worth it. If the home is unlikely to gain its value back (or worse, it’s set to continue losing it) getting out can be a good financial decision. However, it’s one that must be carefully contemplated, as there are long-lasting consequences. 

The Risks

When a strategic default is completed, a foreclosure is carried out by the lender. Though the circumstances are obviously different from a homeowner who is simply unable to make payments, it’s a foreclosure all the same. As such, there are significant risks involved when choosing to walk away.

  • Credit scores take a hit. Just like with any foreclosure, the homeowner’s credit score will be impacted. If the homeowner needs to obtain another loan in the near future, such as to purchase a new home or a car, this could be a deal breaker. In fact, Fannie Mae actually prohibits borrowers from obtaining another loan for seven years after the foreclosure. Even renting after walking away from a mortgage could be a struggle, because lenders and landlords alike take credit scores into account. However, if the borrower is confident in his ability to make due and repair his credit score over time, walking away may still be a viable option.
  • A deficiency judgement could be pursued. For some states (including Florida) banks are able to seek a deficiency judgment for mortgages that borrowers walk away from. This means the lender has the ability to garnish wages or levy bank accounts under the borrower’s name to receive repayment for the difference between the amount of the original loan and the foreclosure sale price. Though they may not necessarily do this, it’s a possibility that must be considered.
  • Other implications. There are some moral issues associated with walking away from a home that may hinder some borrowers from following through. When a mortgage is obtained, the borrower promises to pay it back. When he walks away, he breaks the contract, which some might see as a wrongful act. Additionally, a foreclosure may raise some red flags for other people who are aware of it. Potential employers who run a credit check might question the individual’s financial responsibility, hampering his chances at future employment.

Potential Alternatives

When considering walking away from a mortgage, it’s extremely important that homeowners be aware of every option available to them. There are several other alternatives that could be a better fit, depending on one’s situation.

  • Short Sale. A short sale involves selling the home for less than it’s still owed on the mortgage. This can definitely be a better means of getting out for some, but in this scenario deficiency judgement is still an option for the lender.
  • Refinancing. If there’s a possibility that the home might increase in value, or the homeowner simply wishes to stay in the home, refinancing can be a great option. FHA Short Refinance is available for those with underwater homes to obtain new loans with lower interest rates and better repayment plans.
  • Loan Modification. Loan modification isn’t always easy to achieve for a home that is underwater, but it’s not impossible. The borrower may be able to have the current terms of the mortgage adjusted, depending on the specific situation.
  • Deed in lieu of foreclosure. With a deed in lieu of foreclosure, the borrower transfers ownership of the home to the bank and in some instances, the remainder of the debt is cancelled. However, this isn’t always the case, and a deficiency judgement is still a possibility.

If you’re struggling with a mortgage, whether it’s due to your home falling underwater or simply due to financial constraints, a Miami foreclosure attorney can help you through it. Call the experts in Miami foreclosure defense at Graham Legal for a free consultation today.

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