Voluntary Foreclosure Meaning Pros and Cons Example

Voluntary Foreclosure: Meaning, Pros and Cons, Example

Voluntary Foreclosure Defined

A voluntary foreclosure is initiated by a borrower who can no longer make loan payments on a property to avoid involuntary foreclosure and eviction. It is chosen when the mortgage is significantly underwater.

Distinguishing from Involuntary Foreclosure

Unlike involuntary foreclosure, which is initiated by the lending institution as a last resort, voluntary foreclosure is requested by the borrower. It applies to both residential and commercial properties.

Key Takeaways

– Voluntary foreclosure is initiated by a borrower to avoid foreclosure by the lender.

– It harms a borrower’s credit ratings, but is less financially damaging than involuntary foreclosure.

– The subprime mortgage crisis of the late 2000s led to an increase in voluntary foreclosures.

– Some debtors plan for voluntary foreclosure by accumulating more debt.

Understanding Voluntary Foreclosures

Voluntary foreclosure damages credit ratings but may be considered a cost-effective option for borrowers who can no longer afford payments. Borrowers may open new credit cards and take out new loans before their credit ratings decline. Lenders often agree to voluntary foreclosure requests due to its efficiency compared to involuntary foreclosure.

Reasons for Voluntary Foreclosure

Sudden job loss, living beyond one’s means, and changes in the housing market or interest rates are common reasons for voluntary foreclosure. A deed in lieu of foreclosure is a commonly used method, but rules, laws, and penalties vary by the lending institution and state.

Pros and Cons of Voluntary Foreclosure

Consider the following before initiating a voluntary foreclosure:

– Advantages include the ability to cut your losses and a potentially lesser impact on credit reports compared to involuntary foreclosure.

– Disadvantages include being subject to a deficiency judgment, reduced access to new credit, and possible ineligibility for certain jobs.

Voluntary Foreclosures and the Housing Crisis of 2007–2009

Voluntary foreclosure was rarely used before the housing crisis, but became more common when housing prices declined. The percentage of underwater mortgages increased significantly during this period.

Voluntary Foreclosure of Your Own House

Volunteering to foreclose on your own house occurs when you are unable to make loan payments. Instead of waiting for the lender, you initiate the foreclosure process yourself.

Consequences of Voluntary Foreclosure of Your Own House

If you choose to foreclose on your own house, the lender will cancel the mortgage debt in exchange for surrendering the property. Your credit will be negatively affected, but you can negotiate terms for leaving the property and may receive financial assistance from your lender for the move.

Understanding Deed-in-Lieu

A deed-in-lieu is a form of voluntary foreclosure where you hand over the property to your lender to avoid foreclosure. It should not be confused with a foreclosure.

In conclusion, voluntary foreclosure is a viable option for borrowers who can no longer afford their loan payments. It has its pros and cons, and its usage increased during the housing crisis. It is essential to carefully consider all aspects before proceeding with voluntary foreclosure.