What is a Strategic Default?
A Strategic Default is when a borrower decides to stop paying a mortgage even though they may still be able to afford the payment. When the value of a property has fallen far below the mortgage debt and recovery of the equity lost is expected to take years, a borrower may elect to default based on the mortgage contract. When a homeowner strategically defaults on their home, they are following the mortgage contract that states that in the event of default or non-payment of a mortgage loan, the home shall serve as collateral and the lender has the right to sell the property to get back the borrowed money. Going deeper into debt to pay for a home with negative equity may be financially unwise. A Strategic Defaulting homeowner will use the law to their advantage, by strategically and legally securing for themselves a more favorable financial position.
What is the difference between a Strategic Default and just walking away?
Homeowners who can afford to make their mortgage payment, but choose to stop paying are strategically defaulting. Strategic defaulters have calculated the risks, the time they will take to recover from a foreclosure, and the long-term financial benefits of letting go of the bad investment.
Homeowners who walk away from their property cannot afford to continue making mortgage payments. These homeowners are experiencing significant hardship in keeping up with their overpriced mortgage payment month after month. These hardship cases can be contributed to predatory lending practices which set the borrower up with an unreasonable exploding ARM, the faltering market and economy, loss of employment, or the big banks refusing to modify loans. Homeowners who chose to walk away have said, “Enough is enough!” By walking away from their underwater property, these homeowners are able to take significant steps toward financial freedom.
If I Strategically Default, will I owe any money to my lender?
Whether or not a borrower will owe the lender money following the conclusion of the foreclosure procedure is dependent on the state in which the property was located, the way the loans were created, and the types of mortgage loans.
Do I have to file bankruptcy?
It is not necessary to file bankruptcy. On course with a strategic default and in an attempt to preserve one’s credit score, if a borrower is not making the mortgage payments they can attempt to keep all other lines of credit current.
How long until I can buy a house again?
Home owners who have faced a foreclosure will typically be required to wait 5-7 years until they are able to purchase another home. Some government programs will allow homeowner to purchase after a foreclosure within 3 years. While homeowners have chosen to Short Sale their home, typically they can purchase a new property within 18-24 months, credit permitting.