By York Van Nixon III
Every decade has words or phrases which engender memories of a bygone era. If one says “Peace and Love,” you may be transported to the time of bell-bottom pants and lava lamps, and, perhaps, the psychedelic pops of seeds bursting in a wine-filled bong. Years from now, the first decade of 2000 will probably be brought to mind by expressions such as “too big fail,” “underwater-houses,” and “strategic default.” It is the last one that has found its way into the regular evening news. Besides bankers, it is doubtful any of those phrases will inspire warm and fuzzy feelings. For many Americans, they will recall an era of despair.
Jargon and buzz words often lead to new ones. The latest to bounce around the mortgage industry, “strategic default,” has even made its way to the ears of members of Congress.
In essence, strategic default occurs when an “underwater” homeowner (home worth less than appraised value) decides to walk away from his or hers property without being forced out by foreclosure and subsequent eviction. According to many accountants and economists, homeowners choosing to breach their agreement with banks are often making a sound decision, although ethics of doing so may cause consternation to those more worried about an obligation to their lender than to their family.
Following foreclosure or strategic default, borrowers in most cases will be ineligible for a new mortgage for many years, depending on the lender and the secondary market making the new loan.
This following is a list of waiting times for most situations:
Foreclosure with an FHA Loan
- 3 year wait to get a loan
- Reduced waiting time if the borrower can show extenuating circumstances and re-establishes good credit
Foreclosure on a Fannie Mae Loan
- 7 year wait from the completed foreclosure sale date
- 3 year wait if the borrower can show extenuating circumstances.
Foreclosure on a Freddie Mac Loan
- 5 year wait from the completed foreclosure sale date
- 3 year wait if the borrower can show extenuating circumstances
In lieu of foreclosure, many banks will often allow borrowers to complete a short sale, where the lender accepts less than the owed amount at settlement. The waiting time on average to get a new loan is usually three years. A word of caution before agreeing to a short sale: depending on where you live, banks can sometimes get a deficiency judgment for the remaining balance in court.
As well as deficiency judgments for short sales, banks have recourse for strategic defaults in the District of Columbia (judicial foreclosure required), Maryland and Virginia.
When trying to decide whether strategic default is the right option, keep in mind that while you may have to wait seven years to get a new mortgage, there is the possibility your home may not appreciate to the value it had before the housing meltdown. In that case, it may make more sense to just wait and start over.
It is a lot cheaper to pay market rent than to pay a mortgage you can not afford. While you are renting, it is possible the savings will amount to an ample down payment after seven years.
Sit down with your financial advisor or attorney to make the right decision.
Recourse States
- Alabama (AL)
- Arkansas (AR)
- Colorado (CO)
- Delaware (DE)
- District of Columbia (DC)
- Florida (FL)
- Georgia (GA)
- Hawaii (HI)
- Illinois (IL)
- Iowa (IA)
- Indiana (IN)
- Kansas (KS)
- Kentucky (KY)
- Louisiana (LA)
- Maine (ME)
- Maryland (MD)
- Massachusetts (MA)
- Michigan (MI)
- Montana (MT)
- Mississippi (MS)
- Missouri (MO)
- Ohio(OH)
- Nebraska (NE)
- Nevada (NV)
- New Hampshire (NH)
- New Jersey (NJ)
- New Mexico (NM)
- New York (NY)
- Oklahoma (OK)
- Pennsylvania (PA)
- Puerto Rico (PR)
- Rhode Island (RI)
- South Carolina (SC)
- Tennessee (TN)
- Vermont (VT)
- Virginia (VA)
- West Virginia (WV)
- Wisconsin (WI)
- Wyoming (WY)
Non-Recourse States
- Alaska (AK)
- Arizona (AZ)
- California (CA)
- Connecticut (CT)
- Idaho (ID)
- Minnesota (MN)
- North Carolina (NC)
- North Dakota (ND)
- Oregon (OR)
- Texas (TX)
- Utah (UT)
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