What Is a Strategic Default?

Generally speaking, a strategic default is a decision by a borrower to purposefully default on a debt, that is, to stop making required payments on time to the lender. An important difference between a strategic default and a typical default on a mortgage is that strategic default is a purposeful failure to pay off a loan by a borrower who has the financial resources to make payments on time but who has chosen not to.

Strategic defaults are commonly used after a property's price drops significantly, such as after a generalized real estate market crash, in such a way that the outstanding debt amount is considerably greater than the current value of the property. If the property’s value is expected to remain far lower than the mortgage loan amount for the foreseeable future (this is referred to as "underwater"), the borrower may strategically default, or “walk away” from the mortgage.