Q1: What is a Strategic Default?
A: A Strategic Default is when a borrower, who has the ability to pay, makes the decision to stop making payments on a mortgage obligation.
Q2: What is the difference between a Strategic Default and just walking away?
A: Typically homeowners who strategically default, can afford to pay the mortgage, and are looking to persuade the lender to modify the terms of their mortgage. Often times, homeowners who walk away cannot afford the mortgage and decide to leave the property altogether.
Q3: Do I have to file bankruptcy?
A: The need to file for bankruptcy depends on your individual financial circumstances. Once a lender receives a judgment for foreclosure, the property is sold. If the proceeds from the sale are less than the amount owed, there is a deficiency that the borrower is responsible for and may not be able to pay. In the event that you cannot pay your debt, you may want to consider bankruptcy. You should consult with an attorney to be fully informed of your options.
Q4: Are there options other than foreclosure?
A: A Short Sale, Deed in Lieu of Foreclosure, and Loan Modification are all alternatives to foreclosure. Lenders may extend these options once a borrower has defaulted on a mortgage obligation. There are qualification and approval processes in each option and an attorney can explain the consequences of each of them.
Q5: What is a Short Sale?
A: A Short Sale is when a homeowner sells a property for an amount less than what is owed to the lender. Whether or not the short sale of the property is approved is determined by the lender and takes into account the buyer’s offer.
Q6: Does a Short Sale affect my credit the same as a Foreclosure?
A: Even Credit Professionals cannot predict the exact hit one will take in a credit score. With a Foreclosure or a Short Sale the range can be extensive based on a borrower’s particular circumstances.
Q7: What is the difference between a Short Sale and Foreclosure in terms of tax liability?
A; The tax liability on a short sale is the same as a foreclosure. If the difference between what is owed and what the house sells for is charged off by the bank and the borrower is not protected under the Mortgage Forgiveness Debt Relief Act, the borrower could be held liable for federal and state taxes.
Q8: What is a Deed in Lieu of Foreclosure?
A: A Deed in Lieu of Foreclosure (commonly referred to as simply a Deed in Lieu) is when the lender accepts a deed of the property from a borrower to satisfy a defaulted loan and thus avoids the delay and costs of the foreclosure process. Completing a Deed in Lieu would allow a borrower to walk away from a property without a foreclosure on the borrower’s credit report.
Q9: What is a Loan Modification?
A: A loan modification is a procedure in which a loan’s terms, such as the interest rate, monthly payment, or length of repayment are altered/modified with the approval of a lender.