Strategic Defaulting on a Mortgage: Understanding the Pros and Cons
Owning a home is undoubtedly one of the most significant financial investments that many people make in their lifetime. However, sometimes unexpected events such as job loss or medical expenses can make it difficult for homeowners to keep up with mortgage payments. In such situations, some may consider strategic defaulting – intentionally stopping mortgage payments despite having the ability to pay.
Strategic defaulting is not a new concept; many homeowners started doing this during the housing crisis of 2008. While it’s not an easy decision to make, it can be tempting for those who are struggling to pay their mortgages every month. But before deciding whether strategic defaulting is right for you, there are pros and cons to consider.
Pros:
1) Financial relief: By strategically defaulting on your mortgage, you free up cash that would have gone towards paying off your mortgage each month. This money can then be redirected towards other pressing financial obligations.
2) Timeframe: Strategic defaulters can stay in their homes rent-free until they get evicted through foreclosure proceedings, which can take several months or even years depending on your state laws.
3) Credit score impact: While strategic defaulters will see an initial decrease in credit scores once they stop making payments on their mortgages, this damage will lessen over time and eventually disappear altogether after seven years.
Cons:
1) Legal consequences: Foreclosure proceedings come with legal fees and potential lawsuits from lenders seeking deficiency judgments against borrowers if the sale of foreclosed property does not cover the full amount owed by the borrower.
2) Emotional toll: The stress of going through foreclosure proceedings can be mentally draining for individuals and families alike.
3) Long-term effects on credit score: While credit scores do recover after seven years following foreclosure proceedings or discharge under bankruptcy law (whichever comes first), there may still be long-lasting impacts on future borrowing opportunities.
Before engaging in strategic defaulting, consider all the available options. If you’re struggling with mortgage payments, reach out to your lender and explore alternative options such as refinancing or loan modification. You can also seek assistance from a HUD-approved housing counselor who can provide free advice on navigating your financial situation.
In conclusion, strategic defaulting is a serious decision that should not be taken lightly. While it may provide temporary financial relief for some homeowners, it comes with long-term consequences such as legal fees and damage to credit scores. Weigh the pros and cons carefully before making a final decision and always consult with professionals for guidance on alternatives to foreclosure.