Strategic Default...true or false

FALSE: If the amount owed is greater than the value of the house, the only option is to stop paying and walk away.

TRUE: You have many options, the most obvious of which is to continue paying the mortgage; which, if the total PITI is close to what rent would be for a similar home, may be a very good option. Next, if you have a documentable hardship, cannot remain current on your mortgage payment and are upside-down, other options besides strategic default include: loan modification, forbearance, short sale, deed in lieu and/or filing chapter 7/13 bankruptcy. Depending on the circumstances, any of these options should prove more beneficial to you than simply allowing the lender to foreclose.

FALSE: Following a short sale, the homeowner remains liable for the deficiency, or difference between what is netted from the sale and what is owed to the bank.

TRUE: We have seen many lenders waive the deficiency as part of the negotiation process. This sometimes requires additional back and forth and possibly a monetary contribution or unsecured note from the seller. But once the lender determines that the net sales proceeds approximate the value of their collateral and that the seller has no other assets to contribute, they may be willing to agree to a short sale with no recourse to, or contribution from, the borrower. Also, we have had great success qualifying our clients for a seldom-used program that includes a deficiency waiver AND a relocation bonus check for our sellers handed to them from the bank!

FALSE: There is no meaningful difference to your credit score between a short sale and a foreclosure.

TRUE: The most damaging impact of a short sale occurs only after the period of delinquency exceeds three or four months. In other words, the impact of a short sale on a borrower's credit resembles a foreclosure only after a significant number of missed payments. Otherwise, it is like any other settlement or charge off - the impact would be limited to two to five years and, anecdotally, has a much smaller numerical impact on a persons credit score than a foreclosure. In any event, completing a short sale would not force homeowners to check "yes" to questions from future employers or on future mortgage applications that ask the prospective applicant whether they have ever experienced a foreclosure or deed in lieu of foreclosure.

FALSE: A foreclosure through a 'strategic mortgage default' has less impact on your credit than a 'normal' foreclosure.

TRUE: Credit bureaus do not research the reason behind a foreclosure or default. If you're late on your payments, you're late, and if the lender forecloses, then it is reported as a foreclosure. The credit report should reflect the events that have transpired, no more, no less. Likewise, late penalties, attorney fees, etc. and henceforth, deficiency judgments, can occur as a result of any foreclosure, regardless of rationale.

FALSE: A strategic mortgage default/foreclosure is a better, easier option than a short sale.

TRUE: This is almost never the case. A foreclosure is a unilateral process being controlled solely by your bank...no negotiation, no predictability. A short sale is a bilateral process wherin you, the homeowner, has input and influence regarding the process and outcome. In a short sale, as part of the process, your lender does a cost/benefit analysis to determine if they will net more money accepting your short short sale or more money if they foreclose...and in just about every case, short sales net the lender more than foreclosures (this is true almost by definition, as the lender will not approve a short sale if they feel a foreclosure will return higher proceeds). This, by itself, mitigates any potential deficiency or tax consequence to the you. And in many instances, a lender will waive a deficiency judgment altogether in the short sale, which of course does not happen in a foreclosure context.

If you have reached the point where 'strategic default' has entered your conversation as a possible solution...take the time to call me and schedule a confidential meeting to explore all of your options. You can reach me at this number: 561-602-1258

Thanks for reading...Steve

And obviously, this post, and the blog in general, is not intended to be a substitute for professional legal, tax and associated advice. Consult your attorney and CPA before you make any decisions that may have serious legal and tax implications.