Don’t Just Walk Away: The Downside to Strategic Default

July 14th, 2011 -- by Bill Ivey

In today’s economy, many people face the harsh reality that they cannot afford their home. Their hope – their dream to hold things together in spite of hardship – has proven futile and they must make a difficult decision. Choose to walk away (strategic default or voluntary foreclosure) or choose to short sale.

Let’s face it; neither of these scenarios is ideal. Ideal would be staying in your home, modifying your loan, and managing your mortgage payments.

But sometimes life isn't ideal.

One of the main reasons homeowners shy away from short sales is the fear of having to repay a deficiency. Some banks aggressively seek recourse or repayment for the deficient amount left over after the sell of the home. And in some cases, borrowers have to accept the deficiency and its repayment before the bank will approve the short sale.

In lieu of paying the deficiency, some homeowners consider strategic default and allowing their home to go into foreclosure. They think this is the better option and believe it absolves them of any responsibility to their loan. But that isn't the case.

Consider a few things that happen when a homeowner chooses strategic default:

  1. The homeowner relegates the maintenance and condition of the home to the bank. While banks “winterize” foreclosed homes, they do very little to keep the home in showing condition. These neglected homes become eye-sores for the neighborhood and eventually sell significantly under market value. They also decrease the value of other homes in the neighborhood and further destabilize a struggling market.
  2. When a home is bank-owned, that is public information. So buyers – knowing that a home is bank-owned – won’t be willing to pay as much. Buyers looking for a steal know that the first place to turn is bank-owned properties. When your home becomes the latest steal, some states such as Tennessee, allow the lender to sue for a deficiency judgment. The deficiency is determined the same as in a short sell – what you owe minus what the home sold for in comparison to fair market value – only this deficiency payment will be significantly more.
  3. Strategic default could cost you as many as 150 points on your credit score. This will limit your ability to make future purchases. Additionally, your default will be recorded on your credit report and would be accessible to anyone running a soft credit check (e.g. future employers, landlords, etc.)

In most cases, a short sale is better for the homeowner. It allows the homeowner to maintain the property ensuring that it sells for top dollar, limits the deficiency, and has less of an impact on credit scores.

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Bill Ivey and Enterprise Realtors are not affiliated with the government. Our services have not been reviewed or endorsed by the government or your lender.


We do not recommend that you stop paying your mortgage; this will cause damage to your credit and could cause you to lose your home. Because we know avoiding foreclosure is so important to any homeowner, we recommend that you speak with the appropriate legal or tax adviser before making any decision.  You have the option to reject a short sale if it does not meet your approval. If you decide not to go through with the short sale, then you do not have to pay us the commission.


This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing.

Image: anankkml / FreeDigitalPhotos.net

This post was written by

Bill Ivey – who has written 85 posts on Enterprise Realtors Blog.

Bill Ivey, Certified Distressed Property Expert Broker/Owner, Enterprise Companies (901/857-3888) If you know anyone who is behind or about to be behind on their mortgage and doesn't know what to do, please have them call me immediately! I can help them avoid foreclosure.

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