How Does a Short Sale Differ from a Strategic Default?

 Posted on September 24, 2024 in Real Estate

For some homeowners, owning property can become a financial burden. This is especially true in tough economies when real estate markets tend to plummet. When the value of a house falls, its owner can be placed in financial distress, particularly if he or she still has an outstanding mortgage. In some cases, the owner’s mortgage can be more than the property’s value.

A homeowner who is in financial distress may choose one of several options to alleviate his or her burden. Two of those options: a short sale and a strategic loan default. Consult an Illinois real estate attorney to determine the right option for you.

What Is a Short Sale?

A short sale is when a homeowner sells a property for less than what is owed on the mortgage. For example, a homeowner might owe a million dollars on a house and sell the property for $850,000. The money from the sale is used to cover most of the mortgage, with $150,000 remaining outstanding. This outstanding debt is referred to as a deficiency. In some cases, the lender may forgive the deficiency, while in other cases, it remains the homeowner’s financial obligation. Either way, short sales are done with the approval of the lender.

A short sale is a way for the homeowner to pay off most, if not all, of a mortgage. It avoids foreclosure and pulls the homeowner out of significant debt, but it also negatively affects the homeowner’s credit.

What Is a Strategic Default?

A strategic default is when a homeowner intentionally stops paying the mortgage and abandons ownership of the house. Lenders sometimes refer to it as "jingle mail" because it is as if the owner mails the house keys to the bank. 

Strategic defaults are sometimes done when the house’s value is less than what the homeowner owes on the mortgage, referred to as an "underwater mortgage." This can happen because of a poor real estate market, predatory lending, or both.

Like a short sale, a strategic default can hurt the homeowner’s credit score.

What Are the Differences Between a Short Sale and a Strategic Default?

Although they are both considered last-resort options when a homeowner is in financial distress, short sales bear certain differences from strategic defaults:

• A short sale is approved by the lender, while a strategic default is not.
• Both a short sale and a strategic default can harm your credit score, but a strategic default may do so for longer.
• A lender is more likely to seek a deficiency judgment after a strategic default. A deficiency judgment is when the lender sues the homeowner for the amount due on the mortgage. In the case of a short sale, the deficiency is usually either forgiven by the lender or agreed to be paid by the borrower.
• A strategic default happens when a property is valued less than the mortgage. In a short sale, the property is sold for less than the mortgage but is not necessarily valued as such.

Contact a Gurnee, IL Real Estate Lawyer

Homeowners may take several actions when their properties become financial burdens, among them short sales and strategic defaults. Each option has pros and cons, so you should consult a Waukegan, IL real estate attorney to determine which is right for you. At Newland & Newland, LLP, we are committed to meeting all your legal needs in real estate matters with personalized service. Schedule a free consultation by calling 847-549-0000 today.