What Are the Pros and Cons of a Strategic Default?

 Posted on September 20,2024 in Real Estate

Owning a home can be a great investment in the right circumstances. In some cases, however, it can be a financial burden. This is especially true in economic downturns and recessions like the one in 2008. When real estate markets are adversely affected, the value of property drops. When that happens, homeowners may choose to exercise an option called a strategic default.

A strategic default is a bold course of action that has extreme advantages and disadvantages, both of which this article will explore. Be sure to consult a Texas real estate attorney for more details or questions about strategic defaults.

What Is a Strategic Default?

A strategic default is when a homeowner stops making mortgage payments and relinquishes the home to the bank. It is colloquially referred to as "jingle mail" because it is as if the owner is mailing the bank the house keys.

Strategic defaults are done in cases where the value of the home is less than the mortgage owed on the property. This is referred to as an "underwater mortgage" and it can happen when real estate markets have crashed or if the lender is using predatory and deceptive practices.

What Are the Advantages of a Strategic Default?

A strategic default has significant advantages:

• It releases you from a long-term financial obligation because you no longer own the house.
• It offers immediate financial release because you are no longer paying the mortgage.
• It avoids foreclosure, which comes with fees and unnecessary publicity.
• It can sometimes encourage negotiations. A lending institution like a bank may be willing to renegotiate a mortgage if it knows the owner is about to walk away and leave it with a low-value property.

What Are the Disadvantages of a Strategic Default?

On the other hand, strategic defaults are seen as a last resort because they come with serious drawbacks:

• Homeowners who strategically default on their mortgages suffer a major hit to their credit scores. A strategic default can slash a person’s score by 100 to 160 points. 
• A strategic default can spook lenders and prevent a homeowner from qualifying for loans in the future.
• It can make other loans, such as car loans, more expensive.
• A homeowner who strategically defaults will likely have to wait for long periods before purchasing another home. The Federal Housing Administration (FHA), for instance, has a mandatory waiting period of three years before taking out an FHA-backed loan. Mortgage financing giant Fannie Mae has a mandatory waiting period of seven years.

Contact a Bexar County, TX Real Estate Lawyer

A strategic default can be a solution to financial distress, but it is not the only one. Speak with a Wilson County, TX real estate attorney to discuss your options and their legal consequences. Geoff Mayfield, Attorney at Law has extensive experience in real estate law and is ready to help you create a legal strategy that meets your needs. Schedule a free consultation by calling 210-535-0870 today.