Strategic Default: To Walk Away or Not to Walk Away? Pros and Cons Explored.
Strategic Default: The Pros and Cons
Strategic default is a term used to describe the deliberate decision of a borrower to stop making payments on their mortgage, even if they have the financial ability to do so. This controversial practice has been around for years, but it gained popularity during the last recession when many homeowners found themselves underwater with their mortgages. In this article, we will explore what strategic default is, its pros and cons, and whether or not it’s a good option for you.
What Is Strategic Default?
Strategic default happens when borrowers decide that it’s in their best interest to stop making payments on their mortgage loan. They may do this because they owe more than their home is worth (also known as being “underwater”), or they could be facing other financial difficulties like job loss or medical problems.
When someone defaults on a mortgage loan, the lender can foreclose on the property and sell it at an auction. If the sale price doesn’t cover what’s owed on the mortgage plus any fees associated with foreclosure, then the borrower still owes money to the lender. However, in some states like California and Arizona which are non-recourse states borrowers can walk away from their homes without owing any additional money after foreclosure.
Pros of Strategic Default
1) Financial Relief: One of the most significant advantages of strategic default is that it provides financial relief for those who are struggling financially due to unforeseen circumstances such as job loss or illness. It can allow individuals to free up cash flow that was previously tied up in monthly mortgage payments which can help them stay current with other bills while they get back on track financially.
2) Improved Credit Score: Believe it or not strategic default may improve your credit score over time compared with continuing delinquent payments indefinitely until foreclosure occurs. When you strategically default you’re taking control over your destiny by forcing lenders hand to take action sooner rather than later allowing you start rebuilding credit quicker than if you let the delinquency continue for months or years.
3) Time and Stress Saved: Strategic default can save homeowners a lot of time and stress. If they know that foreclosure is inevitable, then they can choose to walk away from their home before it happens rather than waiting for the lender to take action. This can allow them to start planning for their future without worrying about what’s going to happen with their property.
Cons of Strategic Default
1) Legal Liability: The biggest drawback of strategic default is the potential legal liability that comes with walking away from a mortgage loan. Lenders may pursue deficiency judgements against borrowers in some states who strategically defaulted on their mortgages which means that even after foreclosure occurs, the borrower still owes money on the loan.
2) Credit Damage: While strategic default may eventually lead to better credit over time compared with continuing delinquent payments indefinitely until foreclosure occurs, this doesn’t mean there won’t be damage initially. A FICO score could drop by 100 points or more following a strategic default, making it harder to obtain financing or credit in the future.
3) Moral Obligation: Some people believe that strategic default is morally wrong because borrowers are breaking their contractual obligation when they stop paying on the mortgage even if circumstances have changed since taking out the loan. People often view walking away as a bad choice given one entered into an agreement and should honor it despite hardships if possible.
Is Strategic Default Right For You?
Whether or not strategic default is right for you depends largely on your individual circumstances. It’s important to consider all factors including your financial situation, legal obligations, and long-term goals before making any decisions about walking away from your mortgage loan.
If you’re underwater but still able to make payments comfortably without significant lifestyle changes then staying put might be best until equity returns while other situations such as job loss where income takes a big hit might warrant considering strategic defaults especially if keeping up with payments becomes challenging.
Conclusion
Strategic default is a controversial practice that can provide financial relief for those who are struggling to make ends meet. However, it’s important to weigh the pros and cons before making any decisions about walking away from your mortgage loan. If you’re considering strategic default, be sure to consult with an experienced attorney or financial advisor who can help you navigate the legal and financial implications of this decision.