When borrowers default on second homes
Strategic defaulting – where the homeowner has the ability to pay the mortgage, but chooses to stop making payments – among affluent homeowners with second homes and investment properties is increasing.

MAKING SENSE OF THE STORY FOR CONSUMERS

Homeowners who strategically default are likely to find their credit will be negatively impacted and they should expect to be prevented from getting another mortgage loan for 7 to 10 years.

Many homeowners are concerned about the possibility of the lender suing for the amount of money owed on the loan when a house goes into foreclosure.  Whether or not the lender has legal justification to do so depends largely on where the property is located.

In “recourse” states, a lender can go after the homeowner, and usually other assets like a primary residence, for the full mortgage amount.  Examples of recourse states include Maine, New Jersey, and Hawaii.

In “nonrecourse” states, a lender agrees to accept whatever the property fetches at a short sale, foreclosure sale, or deed-in-lieu, and generally can’t sue for the full loan amount.  Florida, Connecticut, and Arizona are among the nonrecourse states.

California is in a third category called “single-action” or “one-action,” which allows the lender either to foreclosure on the owner or file a civil lawsuit for the full loan amount.  Other single-action states include New York and Idaho.

Homeowners should be advised that even in a nonrecourse state, those who opt for a strategic default on a previously refinanced property may not be protected from lenders, because the mortgage in not in accordance with a first purchase.
Although California is a single-action state, lenders can still sue homeowners for repayment of a second mortgage or home equity line of credit.
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