Much has been written about the “strategic” or “intentional” foreclosure option in recent months. In fact, I have actually recommended a few times to mortgage foreclosure clients I have helped in the past.
There are actually several programs available to help homeowners facing foreclosure to refinance or modify their mortgage loan out of their dilemma. But in just about every case (with the exception of maybe the reverse mortgage), much depends on the borrower’s income situation.
The fact is that if you don’t have the income to realistically pay back the mortgage loan, even after lowering the interest rate to 2%, extending the term to 40 years and forbearing a large part of the principal, then there’s no incentive for lenders to bother trying to work something out. You’ll just end up where you started.
For many homeowners in distress, especially with insufficient income to afford a modified or refinanced mortgage, a strategic foreclosure may not just be the best option. It may be the only option.
The Benefits of Strategic Foreclosure
A common theme expressed by many homeowners who have chosen a strategic foreclosure is the ability to finally get a good night’s sleep.
With a strategic foreclosure, you basically choose to abandon your mortgage. You stop paying, and you ignore the phone calls and letters from your mortgage lender. You accept the fact that there’s no way to salvage your mortgage… so why bother wasting money and energy even trying.
One of the greatest tragedies I’ve had the misfortune of witnessing was seeing good friends — against my advice — liquidate their 401Ks and savings in an attempt to save a home they just couldn’t afford. In the end, they were left with no home and no pension.
In the process of opting for a strategic foreclosure, you’ll suddenly realize the same benefits enjoyed by countless corporations who have decided to throw in the towel… so as to fight another day:
- Live rent free. Depending on the laws of the state in which the property is located, it may take two months or two years before you are finally required to move out of your home. During that whole time, you won’t have to worry about mortgage loan payments. It usually takes most lender three to six months to finally bring most distressed borrowers to foreclosure court. And with the right moves, you can get several more months before you finally get an eviction notice from the sheriff’s office.
- Save your savings. During this period, you can use the money you would have been spending on your mortgage and use that for real necessities — as well as to start saving your money. Since you’ll probably need an apartment in a few months, it’s a good idea to start saving for the security deposit and initial rent.
- Start planning for the future. A foreclosure is one bump in the long road of your life. The key to recovery is to start looking to your future and planning for it.
- Breathe easier. Finally, without the crushing emotional and mental burden of dealing with a mortgage loan that you know, deep down, you cannot afford, deciding on a strategic foreclosure will allow you to start feeling normal again.
I won’t discuss the morality or ethics of a strategic foreclosure at this time. That will have to wait for another blog post. But suffice it to say that many of the lenders behind the foreclosure would willingly abandon their liabilities and declare bankruptcy if they were faced with a similar situation.
In fact, realistically accepting the facts, moving on and rebuilding is an integral part of America’s capitalist system.
Understand the Cost
At the same time, I don’t want to minimize the cost of a foreclosure.
Your credit will take a severe hit, and you won’t be able to qualify for a decent mortgage for at least three years. Fortunately, the damage to your credit of a foreclosure damage usually doesn’t last beyond seven years.
So is a strategic foreclosure the right option for you?
If you don’t have the income or resources to modify or refinance your loan to a realistically affordable level, it may be the only option.
