When a homeowner is at risk of foreclosure, there are a number of ways that they can potentially respond. If their finances are solid but repayment could be made more manageable via a loan modification, this adjustment could mitigate the issues that led to missed payments in the past. Other homeowners file for bankruptcy to catch up on missed payments or pursue short sales to avoid foreclosure when they can no longer afford to remain in possession of their property.
Under a very specific set of circumstances, there is one additional opportunity that makes sense for some individuals who can no longer afford to remain homeowners. This opportunity is referred to as strategic default. It involves intentionally halting payments on a mortgage tied to a home that is worth significantly less than what the homeowner owes their lender.
Important Considerations
One of the reasons it is critical to seek professional guidance before engaging in a strategic default is that the consequences of this action are significant. While committing to a short sale will affect a homeowner’s credit score for a time, a strategic default will affect it significantly because this opportunity serves as an abdication of responsibility for the mortgage debt.
...