What Are Strategic Foreclosures?

Amanda R. Bell

Strategic foreclosures are slightly different from standard foreclosures, in which a person loses his or her home due to the inability to pay the mortgage. In this type, the owner walks away from the home on purpose, stopping mortgage payments despite the fact that he or she is financially able to pay. This is often done due to a home losing value or an inability to sell the home. Although strategic foreclosures are often done 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.

A strategic foreclosure may take place if people no longer live in a home and are struggling to sell it.
A strategic foreclosure may take place if people no longer live in a home and are struggling to sell it.

When a home owner makes the decision to stop paying his or her mortgage in order to lose his or her home on purpose, it is known as a strategic foreclosure. Depending on the mortgage type and local laws, a person may be able to skip three to six months of mortgage payments before he or she enters into foreclosure. From this point, he or she may be able to stay in the home for several months to a year after entering 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 home loses a significant portion of its value. Oftentimes, when a person’s home appraises for less than the remaining mortgage, making monthly mortgage payments can seem futile. This is especially common when a person does not intend to stay in the home for the amount of time it would take to pay off the mortgage, and will end up still owing the lender money when the home is later sold. Walking away from the home, and potentially having the debt written off, is a common reason why people enter into strategic foreclosures.

Occasionally, a person may enter a strategic foreclosure if he or she is no longer living in the home yet is having problems selling it. Rather than making the monthly mortgage payments that he or she can afford, he or she may decide to simply walk away from the debt and put that mortgage payment towards living expenses or savings. This typically occurs when owners cannot or do not want to rent out a home in which they no longer live.

The vast majority of people who purposefully 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 his or her credit report for a certain amount 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 live up to a legal agreement is worth the financial benefit in the future. Despite this, in most jurisdictions, it is possible for a lender to require that a person who walked away from his or her home still pay back part or all of the remaining mortgage. This, added to the severe detrimental effects that strategic foreclosures can have on people’s credit, and, therefore, the ability to make large purchases or lend money in the future, can easily make this type of foreclosure less than strategic.

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