It is a sign of the times: homes going into default. The April Mortgage Monitor report confirms that not only is April time and again the month with the largest increases in mortgage delinquencies but that April 2011 was the largest in many years. A report by Lender Processing Services also revealed the ongoing process reviews and moratoria have resulted in foreclosures starts as well sales decreasing.
Foreclosures’ for mortgages in default continue to take longer. As of April 2011 the average house in foreclosure is 567 days past due with 33 percent having made no house payment in more then two years. This represents the longest period between non-payment and foreclosure. Many may be surprised when they discover that there are advantages as well as disadvantages to a mortgage default.
The disadvantages seem obvious. People who don’t pay their mortgages will eventually have to leave their house and find another place to live. Their credit rating will go down and that may adversely affect both apartment and job hunting as well as insurance premiums. If the home owner isn’t underwater on their loan, meaning the amount they owe isn’t more then the house is worth on the market, they may be able to refinance the house or sell it and retrieve some equity.
However, for those who are underwater on their mortgage there are less options. If the bank agrees they can conduct a short sale, which although it will not provide them with any cash, will help preserve their credit rating or at least enable them to repair the damage more quickly.
Another option is to have their original home loan modified to make the payments more affordable. The bank may agree to this if the home owner shows that they can make the new adjusted payment; for those unemployed or severely underemployed, this may not be agreeable to the bank.
For either of these options to help preserve a credit score they will need to be implemented before the credit rating falls due to non-payment. In other words, you have to act quickly and decisively. But many hold out hope that their circumstances will improve and they will not have to lose their home or they may feel they won’t qualify for a loan modification. Once the damage is done to the credit score, or option one and two are deemed infeasible then option three, defaulting on the mortgage, becomes the only option.
When options one and two can not be used, then the question becomes not if but when to default on the mortgage. Many will continue to make payments until their savings and retirement money is gone and then eventually succumb to foreclosure. There is an alternate path that many others are taking called strategic default, also known as accelerated default, where the home owner stops making payments before running out of money. There is a decided advantage to admitting the inevitability of the situation and treating it in a business like manner.
While it may seem dishonest to stop paying loan payments when you are still able to make them, at least for the time being, it is a financially sound course to follow. There is no guarantee how long you will be able to remain in the house after payments are stopped but odds are it could be months and perhaps even a year or two before you are faced with eviction. During that time money can be saved to purchase another house (for cash, because your credit score will be in the tank) or pay down bills. Aside from sentimental attachment, a house is only an investment, and successful business people do not continue to sink money into an investment which is falling in value.
When defaulting on a mortgage the homeowner must take into consideration the eventuality of their lender filing for a deficiency judgment. The gist of a deficiency judgment is the bank will be able to force the borrower to make up the difference between the monies outstanding on the loan and what the bank was able to receive when selling the house. It would be wise to seek advice from an attorney who can perhaps enlighten you as to the odds of this happening. It might be necessary to file for bankruptcy first.
It may seem a dishonest or shameful option, but the reality is that the bank looks upon their relationship with you as only business. How wrong can it be for you to take the same attitude?