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Many homeowners whose homes are underwater are choosing a strategic default as an exit strategy for their situation.  A strategic default is when the borrower voluntarily stops making mortgage payments although able to continue payments. The purpose of this is so you will have options such as the popular exit strategy – a short sale. Is this a good strategy for homeowners?

One factor to agree on in a strategic default is, continuing to put your money in a home that is clearly bringing you no return is a bad investment from a business perspective. However, I do not endorse a strategic default if you can amply afford your mortgage payments but wish to walk away from the home solely because it is underwater. It would be unethical and your losses would be much greater than what you simply calculate (difference between principal amount owed and sales price). Remember, you are losing years of mortgage payments and interest as well as your down payment and your future lenders will be able to see this conduct when applying for a new loan. More information is here on Dave Ramsey’s site.

The issue with this strategy is, you do not have to be in default in order conduct a short sale on your property. The popular (but ultimately false) notion is that you must be in default in order for lenders to allow a short sale. This is not true even if you have money in your savings and/or other retirement accounts.

How are you able to avoid defaulting and damaging credit AND still short sell your home? Show Inevitable Financial Hardship. If you can foresee an inability to make payments in the future 6/12/18 months from now, lenders will allow a short sale on your property. Our d have closed multiple short sales without their clients missing a single payment.

You may be wondering, what if they check and find I have money in the bank and deny my short sale request? From our experience, the only financial statements they request are bank statements and very rarely will they ask for more information beyond that.

What is the incentive for not missing payments prior to short selling? It saves your credit from being severely damaged. On June 1, 2012, 3 major credit reporting agencies announced that the impact of short sales on a borrower’s credit will be significantly reduced to little to no negative credit ramifications if the homeowner stays current. Also, if you haven’t missed any payments prior to short selling, it may be possible to obtain another mortgage immediately.

What do you think about a strategic default?

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Hope this helps

Peter