What Is A Strategic Default?

by Lynnette Khalfani-Cox, The Money Coach on May 10, 2011

in Real Estate

Q: What is a strategic default?

A: A strategic default occurs when a homeowner who appears to have the ability to pay for their home nevertheless decides to stop making mortgage payments, yet continues to keep up with other financial obligations, such as credit card bills or auto loans.  In addition to being underwater – or owing more on their homes than the properties are worth -  strategic defaulters typically have better FICO scores, larger mortgages, and smaller amounts of credit card debt, according to a FICO study. Strategic default can have a significant negative impact on your credit score.

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Lynnette Khalfani-Cox, The Money Coach

Personal Finance Expert and Co-Founder at Ask The Money Coach.com
Lynnette Khalfani-Cox, The Money Coach is a personal finance expert, speaker, and author of numerous books on personal finance. She appears frequently as an expert commentator on television, radio and in print.

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Lynnette, this is an amazingly good description of strategic default (SD). I especially appreciate that you picked up the recent FICO study results.

It’s important that readers understand that foreclosure and short-sale or deed-in-lieu affect the credit score about the same.

One study found by the FRB a 10 FICO point difference in impact, and a more recent study by FICO[1] and VantageScore[2] found no difference between short-sale and foreclosure.
[1] FICO results: Research looks at how mortgage delinquencies affect scores

[2] VantageScore findings: Impact on Consumer VantageScore Credit Scores Due To Various Mortgage Loan Restructuring Options

[3] Industry definition of what is a “mortgage only defaulter” (strategic defaulter) comes from this TransUnion/Morgan Stanley research paper (See especially page 3.)

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