Voluntary Foreclosure

A voluntary foreclosure is a foreclosure proceeding that is initiated by a borrower who is unable to continue making loan payments on a property, in an attempt to avoid further payments and prevent involuntary foreclosure and eviction. An involuntary foreclosure, on the other hand, is initiated by the lending institution in order to take possession of a property to recover their losses and is typically the last option for borrowers unable to make payments on their loans. Borrowers can seek voluntary foreclosures from banks and other lending institutions for both residential and commercial properties.

There are several phrases used to describe voluntary foreclosures, including strategic default, walking away, jingle mail and friendly foreclosure. A deed in lieu of foreclosure is one of the most commonly used forms of voluntary foreclosure. The rules, laws and penalties for voluntary foreclosures vary widely by lending institution and state.

Voluntary foreclosure is extremely harmful to a borrower’s credit ratings and can make it difficult to rent or buy a home and get loans approved for many years afterward, but it is not as financially damaging as an involuntary foreclosure. Therefore, it can be a cost effective option for some borrowers who, rather than struggling to make payments each month, conclude that they will be unable to continue making payments. Many debtors plan for a voluntary foreclosure by opening new credit cards and taking out new car loans and mortgages before their credit rating drops. Lenders will often agree to a borrower’s request for voluntary foreclosure because it can make the process of retaking property and collecting debts much faster and more cost effective than an involuntary foreclosure.

Reasons for voluntary foreclosure include a sudden and unexpected job loss, the realization that one is living beyond their means, and changes in the housing market and variable interest rates.

Prior to the American housing bubble and subprime mortgage crisis of the late 2000s, voluntary foreclosure was a rarely used option for borrowers struggling to afford their property loan payments; however, it has become much more widely used in the years since. In 2007 and 2008, housing prices plunged, often posting double-digit declines in value. At the start of 2010, approximately 25 percent of all mortgages were underwater, meaning the amount owed on the mortgage was more than the value of the home. According to some studies, voluntary foreclosures more than doubled from 2007 to 2008 and represented more than 25 percent of all defaults in 2009. Voluntary foreclosures have remained common over the last decade, as home values have still not increased enough to free many borrowers from the burden of negative equity.