If you're reading this article, there's a decent chance you have a mortgage that is underwater and are considering walking away in a strategic default. i.e., you want to stop paying your mortgage, get rid of your property, and move on with your life without having your financial future destroyed.
There is a Process - That is a Bit Strained Right Now
Certainly if you are considering strategic default, you're not alone. Millions of homeowners are having the same conversation in their heads right now. Thus you may be wondering what actually happens if you stop paying your mortgage.
A process starts when you stop paying your mortgage. The exact details vary from lender to lender, but the general process is quite uniform. Of course, in the current real estate crisis the sheer volume of mortgage defaults has turned many bank policies upside down, so it is entirely possible that things will not follow the process that they generally do.
For example, banks are so far behind on their caseloads that often they do not take any action on non-payment for many months longer than they normally would. You cannot count on this, but a delay means that you can probably stay in the house and live mortgage free for many more months, all the while saving the money you would have spent on the mortgage or rent.
Generally speaking, if you miss a payment, the bank will let you know right away that you have missed it - oftentimes with the "nice-guy" attitude that there may have been a mix-up in sending the payment that caused them not to receive it. If you ignore this warning and continue not to pay, you will eventually start hearing frequently from the bank's collections department.
The collections department will be focused only on when and how much you can pay. If you have made the decision to stop paying altogether and seek a solution, you would typically inform the collections department that you cannot pay now, and that you do not anticipate being able to pay. i.e., that you want to seek a "workout" on the mortgage. They will likely inform you that you can speak to their "workout department" or "loss mitigation department."
Usually the collections department and the workout department are quite unrelated, so even while working with the workout department, you will likely be annoyed by continued calls from the collections department.
Won't They Just Foreclose on Me?
Foreclosure definitely will happen at the very end of the road if you just stop paying your mortgage and do nothing else. But as I will discuss in future articles, there are several other common options that may be available to you that will prevent foreclosure.
While you are working on a mutually acceptable solution with the workout department, the foreclosure process will be starting to move forward behind the scenes. Again, based on the enormous volume of delinquent payments at these banks, it may take MUCH longer than normal for this to happen - possibly not even for a year or more, in some cases.
You should typically assume that within about 2 to 4 months of missing your first payment, the lender will initiate foreclosure proceedings. You will start receiving formal looking documents, basically outlining that you are in default of the loan and that the bank has initiated a foreclosure suit against you.
The laws and processes surrounding how foreclosures are pursued vary from state to state, but it good universal advice to say:
DO NOT IGNORE THE FORECLOSURE NOTICE WHEN IT COMES.
Once you receive the foreclosure notice, you are well advised to have a foreclosure attorney take the case for you. By having an attorney take action on your behalf, you can generally forestall any truly negative actions on the foreclosure for many months - often long enough to get your workout handled, and keep you in the house for free in the meantime.
If you plan and execute your strategic default strategy well, then while the foreclosure suit is slowly plodding along, you will be coming to a successful workout agreement with the bank via, e.g., short sale or deed in lieu of foreclosure. If a successful workout cannot be arrived at, then eventually the foreclosure will grind on to a conclusion and you will lose the house. Foreclosure may turn out to be a successful conclusion for you as well, depending on your situation.
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