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What Is Strategic Default and Should You Consider It?


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Since the 2008 real estate bubble meltdown, an unprecedented number of Americans have opted to do what’s called a “strategic default.” This is when you choose to default on your mortgage not because you can’t afford it, but simply because it makes more financial sense than any of your other options.

What specific conditions might warrant a strategic default? What are the ramifications? Should you consider it? Let’s take a look.

==> When to Consider Strategic Default

Almost everyone who considers strategic default is upside down on their home. That means they owe more on their mortgage than the home is worth.

Another common attribute is if there are no plans to purchase a home in the next five to ten years. If credit isn’t important to you, then walking away from a mortgage has little consequence.

Strategic defaults are common, although certainly not limited to, the elderly. If you’re retired and you’re living on a modest social security and pension check, why divert all that money into a losing investment for the next ten or more years? Instead, people choose to just walk away.

Perhaps you feel like you can’t make the payments anymore. Or perhaps you can, but it just doesn’t make sense to you. The home loan’s amount is for so much more than your house is worth, it feels like you’re just throwing money down the toilet.

So what are the ramifications?

==> The Moral and Ethical Questions

One important area people who are considering strategic default need to think about are the moral and ethical questions.

What does defaulting mean to you, as a person? What does it mean about your integrity and your word? What does it mean to choose to walk away from a loan, even if you can repay it?

It’s a question every person has to answer for themselves.

==> The Effects on Your Credit

If you default on your mortgage, you can pretty safely assume that you won’t be able to get any kind of credit card or loan for the next two or three years.

Furthermore, you probably won’t be able to buy another home for at least five to seven years.

==> Potential Legal Recourse

If lenders know that you’re earning more than enough to repay the loan but choose to walk away, they can choose to sue you.

If you don’t have enough money to make it worth their while, this might not be a concern. However, if you do have other assets that a court of law could get to, you may have to consider the potential of a lawsuit when you choose to default.

==> What It Looks Like

If you choose to action a strategic default, you get to live in what’s basically a rent free house until the bank forecloses on the home.

The bank will have to go through standard foreclosure procedures. Until that time, you still own the house. Once you lose the home, you can then move on to renting property or finding another place to live.

Strategic default is a difficult choice – not one to be made lightly, as its ramifications are huge in many different areas. That said, if you’re considering it, you’re not alone. Thousands of people across the nation have chosen this path and many more will continue to in the years to come.