Strategic Default vs. Continuing to Pay on an Upside Down Investment Property
The housing market is finally creeping towards a recovery, but several years of declining property values and record numbers of foreclosure actions have left many homeowners stuck in homes that are not even worth what they owe on the mortgages. This is a unique problem for people who own investment properties. When your primary residence is underwater, you still have a vested interest in keeping it because it provides you with a place to live, even if it’s turning into a bad investment. However, when you own an investment property, continuing to pay a mortgage on it when it won’t ever make money for you can seem illogical since you presumably already have a home you are living in. Many owners of investment property are considering a strategic default.
Is Strategic Default the answer?
A strategic default is when a homeowner decides to stop making mortgage payments, forcing the bank into a foreclosure action. The owner will vacate the property voluntarily. While it used to be a controversial and shocking action, more and more property owners are doing it because their mortgages no longer make financial sense. The setback that will occur to a credit score is worth getting out from under a bad investment. Even celebrity financial advisors like Suze Orman are recommending it after all other available alternatives have been tried. You need to expect that you will take a financial hit somewhere – either in your credit rating or in the money you lose on this investment.
If you don’t like the idea of a strategic default, but you are frustrated with paying on an upside down mortgage on your investment property, there are other actions you can take. First, try to get a loan modification from your lender. They can reduce the principal that you owe, or reset your mortgage so that you don’t owe more than the house is worth for the foreseeable future. If your lender refuses to modify your loan, even with the federal programs in place to encourage modifications, you can try to sell it. Getting a price that will pay off your mortgage might be difficult, so you’ll have to ask your lender if a short sale is permitted. In a short sale, you’ll sell the property for less than you owe. If your lender agrees, you don’t have to worry about defaulting.
When a Lender Refuses
When lenders refuse to consider a modification or a short sale, you have to decide whether you are better off with a strategic default or an upside down mortgage. Most advisors will tell you to stick with the mortgage payments if you are only 10 or 20 percent underwater. If you can keep your investment property rented for five or more years, you will at least be able to keep up with the mortgage payments while your home value increases. However, if the investment property is vacant, or if the amount you owe on the home is more than 20 percent of the value, a strategic default might be your best option. It will allow you to leave your investment property behind and rebuild your credit and your financial future.
This post was written for BrowardCountyReview.com by Stephen K. Hachey. Stephen is an Orlando real estate attorney specializing in loan modifications, short sales, foreclosures and much more. He is also the owner of his own practice, the Law Offices of Stephen Hachey, PA.