Strategic Default vs. Strategic Foreclosure
Strategic Default and Strategic Foreclosure DefinedStrategic default commonly refers to the practice of "walking away" from a mortgage. In this sense, borrowers simply stop paying, pack up, and move out, leaving the bank to foreclose on the home.
Strategic foreclosure is the practice of getting the bank to take back your home as full satisfaction of your debt.
Strategic Default Is Not A Good ChoiceRegardless of what you may read on the Internet, strategic default is a bad idea for 99.9% of borrowers. In addition to the damage it will do to your credit, homeowners who simply "walk away" may be liable for a deficiency judgment against them. That deficiency is the difference between the value of the loan and what the property sold for at foreclosure. Since most people engaging in strategic default are also underwater on their mortgages, this is probably a hefty sum of money.
To make things worse, Fannie Mae has established new guidelines that could prevent you from obtaining a new mortgage for up to seven years.
Strategic Foreclosure Is A Better ChoiceIn a strategic foreclosure, an underwater homeowner attempts to return the property to the bank. In Illinois, this is commonly done in two ways: a deed-in-lieu of foreclosure and a consent foreclosure.
A deed-in-lieu of foreclosure is used before foreclosure is filed. The bank agrees to take the property and to not pursue a deficiency judgment against the borrower. Some banks will want you to list the home for ninety days before they will accept a deed-in-lieu. If you have a second mortgage, it is unlikely that you will be able to obtain a deed-in-lieu.
A consent foreclosure is done after the bank has filed a foreclosure action. This is basically the same as a deed-in-lieu, except that you are consenting to a judgment of foreclosure and sale being entered against you. This can impact your credit score, but you are also protected against a deficiency judgment.
Either option is best done by a qualified attorney, but can be pursued on your own.