strategic default
Deliberately defaulting on a mortgage when the home is significantly underwater despite having the ability to pay.
Example
“With the home $150,000 underwater she considered strategic default after exhausting all other options.”
Memory Tip
STRATEGIC — defaulting by choice not necessity. Significant consequences to credit and taxes.
Why It Matters
Strategic default affects your credit score severely and can have legal consequences, even though you have the financial means to pay. Understanding this concept helps you recognize the difference between financial hardship and a deliberate financial decision that prioritizes investment returns over moral obligations.
Common Misconception
Many people believe strategic default is a smart financial move that saves money, but it can result in lawsuits, deficiency judgments, and damaged credit for seven years or more. Banks and lenders often pursue legal action to recover losses, making this strategy far more costly than the initial savings.
In Practice
A homeowner purchases a house for 300,000 dollars with a mortgage of 250,000 dollars. When the housing market crashes, the home value drops to 150,000 dollars, but the homeowner still earns 100,000 dollars annually. Instead of continuing payments, they default strategically, believing the lender will take the loss and move on. However, the lender sues for the 100,000 dollar deficiency and wins a judgment against them.
Etymology
Modern real estate finance term — default as a financial strategy rather than due to inability to pay.
Common Misspellings
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