Dear Piggy: How long have I got to live in my house if I stop paying my mortgage?

A squirrel recently beaned me in the head with a chocolate chip cookie. He was sitting on a run of conduit that runs above my back deck. It was about a 15 foot drop from the squirrel to the deck, and my head just happened to be in the middle. I shall believe this as it's more comfortable than believing that the little bugger was aiming for me. Regardless, he had led the way in developing a little squirrel/pigeon commune in the rafters. It was time to either invest in helmets or call pest control.

Once the pest control fellow was finished with evicting the local fauna, the conversation turned (as it often does in my line of work) to evictions of another type.

"My girlfriend just divorced from her former husband," went the story, "and she's currently still living in one of the four houses that the owned together. She's on the mortgage. He has opted to file for bankruptcy, stop paying his mortgages and wait for the lenders to foreclose on the homes. I'm worried for her - how long does she have before the sheriff puts her out on the street? Her court date with the bank is this week."

I naturally figured this question is probably in the minds of many people, so I figured I'd take it on in public.

First of all, this is called "strategic default" - deliberately choosing to lose your home through non-payment when you could actually afford to keep it - and it really pisses me off.

A really 1-Percenty thing to do

The 99% when facing job loss will stop paying their mortgage only when they have no other option and no money left in the bank. It's accidental and very heartbreaking when it happens. The 1% will strategically default because it's easier to take the credit hit and wait out the recovery period in one of their other homes, and because it's financially more advantageous to just walk away from the bank rather than honoring their debts. (Note: I know full well that more than 1% of the population choose to strategically default. It's a very 1-percenty thing to do, though.)

The prevalence of strategic defaults make it tougher for all of us to get loans, as they result in tighter lending criteria, higher loan costs, devastated neighborhoods, and more plummy homes that become the property of outside investors when they're snapped up at auction later. (Freddie Mac has quite a lot to say about strategic defaults and why they prevent all of us from having nice things.)

But all of this aside, some of you will choose to do it and I probably will wind up working with some of you even if you have strategically defaulted. Lest this entry come back to haunt me too badly in 5 years or so when your credit has recovered, let's talk a bit about my friend's question to give you some points of reference.

  • 30 days after your first missed mortgage payment: Your credit score, if it was over 700, has dropped by about 100 points. (Source: [1]) For all but the best credit scores (780 or higher) this has knocked you out of contention for an apartment with a reputable landlord, as 650 is a very common cutoff point. It will take up to 3 years for your score to recover.
  • 60 days behind on mortgage payments: You are now considered "seriously delinquent" and part of the shadow inventory of homes heading towards foreclosure. At this point you will have just missed your third payment's due date. You're eligible for a bank foreclosure filing at any point now.
  • 90 days late on mortgage payment: Even the folks who had the best credit scores just 4 months ago will now have trouble finding an apartment for the next several years.

On the road to Foreclosure in Illinois

At this point the bank probably will have filed with the court to foreclose. Illinois is a state that requires court action before a bank can foreclose on you. You will receive a letter (or should receive a letter) with a court date. There will be a lis pendens filing recorded on your property which will be publicly accessible to anyone who chooses to look up your address or your name in the proper places.

  • At the courthouse: Most homeowners get a 90 day "redemption period" after their court date to try and fix their loan, pay down their debt or otherwise save their home from foreclosure. Going to the appointed court date can open up a whole range of new options for you in saving your home if you really want to do so. If you don't show up (and sometimes even if you do) the lender can request that the redemption period be shortened to 30 days.
  • At the end of the redemption period: If the lender can prove that they hold your loan, and you haven't settled your debts, the lender gets your house. The foreclosure happens, your title is handed over, you have lost your house. The foreclosure goes on your record. All but the best original credit scores will now have sunk below a 600. You will have trouble getting a cell phone or even a gas bill at this point. It will be 5 years before you're within shouting distance of good credit, 7 years before you start seeing good interest rates again. Folks with security clearances will lose them.

If you're still living in your the lender's home, unless you have made other arrangements with your lender, you are now treated as if you were a tenant living in apartment after the lease has expired. You will receive a 30 day notice to vacate the property voluntarily. If your lender serves you with proper notice and you choose to continue to stay on the premises you're now headed for an eviction.

Has anyone else noticed that it's now been 5-7 months since you stopped paying your mortgage and you're still living in the house? At this point if you're in Illinois outside of Cook County the eviction steps are far less complicated. Chicagoans and other Cook County residents have a very influential sheriff, though, who has created a pretty sizable notice window for evictions in the case of foreclosure. Here's what lies ahead for you:

  • At the end of the 30 day notice: The lender files an eviction if you haven't left yet. Now, as we've seen in last Friday's survey of Cook County evictions, you're looking at a likely 1-2 month case.
  • 30 days after filing: The lender goes to court (again) to evict you. If they can prove that they've served you and that they have right to title, they'll get the right to force entry and remove you.
  • 30-60 days after the eviction case closes: The sheriff shows up to throw you out.

So we're looking at a 8-11 month lag from first skipped payment to out-on-the-street if things go smoothly for the lender and they do everything right. If you play it right you might be able to ride the Christmas moratorium on evictions for another couple of weeks and push it close to a year. I hope you've taken that year of living free to save up one heck of a lot of cash and open what credit cards you can, as it will be most of a decade before you'll be able to purchase a home or see good interest rates again.

Personally as this is a practical shelter blog I had to discuss these matters, although it makes my Realtor bump itch to be talking about strategic default for this long. For some of you this will be the most practical route, even though it's totally unethical and at the end completely undignified. Please talk with your financial adviser before you opt for a strategic default! Some of my investor readers they will be happy to learn that people do this and leave them with properties to pick up at steep discounts. My first-time buyer clients and other fine, upstanding, ethical piggies are probably feeling a little dirty right now, and for that I apologize. People do strange things with other people's money.

So, my pest control contractor has about 5-7 months left before his lady friend needs a new place to crash. Hopefully he'll have lots of opportunities after this rainy Chicago spring to rack up some big paychecks and feather his nest a bit before that happens. I wish him all the best, as long as no more of that work involves me, squirrels and baked goods.

Stock image is stock.

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