Vance P. Truman, Attorney at Law
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What is a strategic foreclosure?

Have you ever heard someone talk about a "strategic foreclosure?" Maybe they're going through a rough time financially and trying to figure out what to do.

Essentially, this is just another term for "walking away" from the mortgage debt they already have. It means choosing to stop making payments and just letting the bank take the house.

Why would someone do this? It's most common when the mortgage is underwater. This means that you owe more on the house than the house is actually worth. If you sold the house, you would still owe money, but you'd have nothing.

For instance, say you bought a home for $400,000. Then the market fell. Now your home is worth $250,000. You have paid off $50,000, but you still owe roughly $350,000 on that initial mortgage.

If you keep paying the mortgage, you feel like you're ripping yourself off, paying vastly more than the asset is worth. If you sell the house, though, you would still owe the bank $100,000 for nothing, and you'd have to buy a new home on top of that -- or at least rent a place to live.

When people start to run the numbers, they often decide that they just want to take the hit to their credit score and let the bank take the house. They then try to move forward without a home or mortgage debt.

There are risks to doing this, of course, such as the drop in credit that may make it hard to get another mortgage in the future. With any foreclosure proceedings, make sure you carefully consider all of the options you have.

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