3 Reasons to Consider Strategic Default

Strategic default is a situation where a homeowner decides to walk away from their mortgage, even though they have the money to make payments. There are many potential reasons that someone might consider using the strategy. Here are a few reasons to consider strategic default with your mortgage.

1. Upside Down Mortgage

The most common reason that people consider using the strategy is because they are "upside down" on their current mortgage. With this scenario, you actually owe more money than the house is worth. This presents a situation where it is basically impossible to sell the house or refinance. Many people get discouraged when they realize that the value of their home is less than the balance on their mortgage. As a result, they walk away. If you were to try and sell the house, in a bad market, you are left with a balance on the mortgage.

Also, you are unable to refinance the home because the value of the home is less than the amount you want to borrow. In this way, you do not have collateral for a refinance. A lender lends money, based upon the current value of the home. Homeowners in this situation are left with two options: They can choose to stay in their homes and wait out the market, or they can walk away.

2. Pay Down Other Debt

People that are in debt are often tempted to use a strategic default to help their current situation. In this scenario, people stop paying the mortgage and use that money to pay down their other debts. This might include paying off credit cards, auto loans, student loans, and other personal loans. Most of the time, you will have up to one year in your home before you are kicked out. This provides you with several months of free rent. This money can be used in a variety of different applications that can help you get out of debt. Going through foreclosure negatively impacts your credit score. However, by making regular payments on all of your other debt and eventually paying it off, you can quickly rebuild your credit score. Therefore, this could be a legitimate strategy to help you completely eliminate all forms of debt and start fresh.

3. Business Considerations

Another reason that people sometimes consider strategic default is because of their personal business needs. Many people want to begin a business, or want to maintain their current business. However, they may not be able to qualify for a loan from a bank for this purpose. If they already have a home, they could apply the money that they would be using on their mortgage every month to business expenses. If a person truly believes in the viability of their business, this can be a legitimate way to keep it afloat. Many people choose to start their own business once they have been laid off and there are only a few other opportunities for work.