What is Strategic Default?
Strategic Default is when a homeowner makes the decision to stop paying their mortgage payment even though they have the ability to continue paying it. It's estimated that approximately 33% of mortgage defaults are strategic now, which has risen greatly in the last few years due to the fact that the majority of mortgagees are underwater. A homeowner would usually make the decision to opt for strategic default when the amount that they owe on the home is much greater than the property's market value. When a homeowner realizes that they have negative equity and that they are paying monthly for a bad investment, their first thought is a strategic default to increase their net worth and decrease their debt amount.
A strategic default should have a well-planned asset protection plan in place first. Most lenders will allow a home to be sold by processing a short sale, which is a much better option than defaulting on the loan. This has the same effects as a strategic default because it will increase your net value, dump the bad investment, and allow you to move forward without the burden of the mortgage debt, however it has the added benefit of looking much better than 'default' on your credit report and therefore allows you to maintain a higher credit score than you would with a 'default' on your record.
We highly recommend consulting with us before defaulting on any loan to see if a short sale is an option for you.