As a homeowner, it can be very difficult to make your mortgage payment month after month for years. This is especially true if you owe more than what your home is worth. In this situation, you might be considering strategic default. Here are the basics of what you should know about strategic default.
What is Strategic Default?
Strategic default is a situation in which a homeowner has the ability to make mortgage payments, but he simply stops making them. This is usually the case when the value of a house declines significantly, and the homeowner is upside down on his house. Eventually, the homeowner will walk away from the house, and allow the lender to foreclose on it.
Saving Money in the Short-Term
One of the benefits of using strategic default is that it can help you save money in the short-term. When you use this approach, you may get to live in your home for several months without paying any mortgage payments. For example, you might get to stay there for as long as six months without having to make any kind of payment. During that time, you can save up quite a bit of money for your future housing.
Upside Down House
This strategy is often used when the real estate market is down, and the value of homes decline to a point that is less than what homeowners owe. In this situation, homeowners feel stuck in their homes because they can’t sell even if they wanted to. They also cannot refinance if they are currently stuck in a bad mortgage. The other option in this situation is to simply stop making payments and walk away from the house.
Although this strategy can be tempting when you are in a bad situation, it doesn’t come without some major consequences. For one thing, your credit score is going to be damaged when you do not make your payments, and eventually go through foreclosure. This will make it difficult to my house again for a few years. These records stay on your credit report for up to 10 years, making it clear to a lender that you willingly could afford your home yet still walked away.
On top of the credit score damage, your lender may be able to sue you for the amount that you owed on the house. This depends on whether you live in a state that offers recourse or non-recourse mortgages. If you have a non-recourse mortgage, the lender cannot do anything to get you to pay after taking your house. Before using this strategy, make sure that you understand the rules of your mortgage and the potential damage to your credit score.