Strategic Default, Short Sales and Loan Modification: What Choice is Best for Your Financial Future?

1.11 million Americans reported being "underwater" on their homes in 2011. Underwater is a commonly used financial term that is used when a homeowner owes more money on a property than it is worth. During the financial crisis, property values plummeted to rock bottom and millions of Americans suddenly experienced the unsettling feeling of owing hundreds of thousands of dollars more on their property than it was actually worth. If you are experiencing you should consider all of your options.

Homeowners who wish to get rid of an underwater or distressed property have several options.




Strategic Default: Statregic Default is when a homeowner makes the conscious decision to stop paying their mortgage, even if they can technically afford to do so. Sometimes homeowners can live for over a year in a home they have stopped making payments on. In fact, due to the high number of home owners who are defaulting on their mortgages, over 40% of default homeowners have been in their homes for more than two years!
If you are considering a strategic default, there are several things you should consider. Many states lack laws to protect homeowners after a strategic default. In those states, your bank can try to recoup money from you through other assets (such as cars or savings accounts) even after you hand the property back to the back. Your credit will also suffer if you choose a strategic default, so you may want to avoid this option if you will need good credit for a major purchase in the next few years. Financial experts estimate that it takes anywhere from three to five years for a person's credit to be regained after a default.

Short Sale: Some homeowners decide to sell their house in something called a short sale to pay the bank. During a short sale, the homeowner lists their house for sale for a lower amount than they owe the bank. While short sales are a viable option for some, the most important thing to remember is that short sales can take a lot of time. If you want to get out of your mortgage quickly, a short sale is not for you. Short sales are associated with long waiting periods for two reasons. One is the obvious difficulty of finding a buyer for a home in a short period of time. The second is that in a short sale, the bank must approve of the final selling price of the property. If the bank rejects the offer of a potential buyer, the house could remain on the market for months longer than it would have if it was sold in a regular market. Fortunately, a buyer has the option of increasing their bid if the bank rejects the initial offer.

Loan Modification: Here at the office we have a lot of clients who hire us to help with their loan modifications. Loan modifications are an agreement you work out with your lender to adjust the terms of your mortgage so that you have a more affordable payment plan. Two major advantages to choosing loan modification are that you are able to keep your home and you also do not experience the credit hit that occurs during short sales or strategic defaults. However, in order to receive a loan modification, you must first go through a lengthy application process with your bank and not every borrower will qualify for a modification. However if you do qualify and would like to stay in your current home, loan modification may be the best option for you.

Whatever route you decide to take, it is best to consult a lawyer. A legal professional can explain all of your options in further detail and assist you with any legal paperwork associated with the process. If you are considering a major financial decision, feel free to call my office at 718-317-5007.

- Kevin McKernan