A property is a homeowner’s prized possession, but it is only theirs once the mortgage is paid in full. So, a mortgage payment is due every month for the next thirty years. Should the borrower default on this arrangement, the lender can foreclose on the property. But why do foreclosures happen?
Foreclosures happen when borrowers cannot make mortgage payments. Factors contributing to this are rising interest rates, job loss or decrease in wages, death or divorce, and medical bills due to inadequate medical insurance. Some homeowners also continually make new debts.
Read on for more about why many homeowners face foreclosure on their property. There are also some valid and interesting frequently asked questions regarding the foreclosure process.
What Are The Main Causes Of Foreclosures?
There are many reasons why borrowers are unable to make monthly payments on their mortgage over an extended period. This leads to the financial institution foreclosing on their property. Here are some leading causes of foreclosures.
Negative Equity Leeds To Foreclosure
Negative equity happens when the value of property declines. There are several reasons why a home could lose its value. It could be because of the lower price of comparable properties, the age, and condition of the house; the neighborhood is no longer popular with new buyers, or the state of the housing market.
When the house’s value falls, the homeowner owes more on the mortgage than what the home is worth, so selling is not a viable option. The best choice for the owner is to refinance if it is at all possible.
Rising Interest Rates Could Result In Foreclosure
When the homeowner initially purchased the home, the interest rate for the mortgage is often at subprime, which is higher than prime. Homeowners with lower credit scores are the ones that are granted subprime interest rates.
But these rates can reset a few years later and sometimes at an incredibly high value. This can make it difficult for the homeowner to keep up with the mortgage payments.
Job Loss Or Reduced Income Can Result In Foreclosure
If the primary breadwinner in the family loses their job or their salary has been reduced, it is challenging to keep up with mortgage payments. Often both partners in the family earn to afford the mortgage payment. When one of these parties loses their income, they have difficulty keeping up their property loan.
Death Or Divorce Can Lead To Foreclosure
A death in the family, mainly if one of the members contributes toward the mortgage, can cause a default on the payments. Similarly, a divorce has the same effect, and many homeowners face difficulty regarding mortgage repayments.
Medical Emergencies Due To Illness Is A Cause Of Foreclosure
The exorbitant cost of medical treatment should a family member becomes ill is one of the significant causes of bankruptcy in the U.S. today. Inadequate health insurance is often the contributing factor to accumulating medical bills. And together with other unforeseen financial constraints, this can lead to homeowners being unable to pay their home loans.
Debt And Denial Are A Contributor To Foreclosure
Credit card debt and other debts accrued due to living a lifestyle above their means are major contributors to homeowners’ inability to afford to pay their mortgages. Often, they will be in denial of their extravagant lifestyle and, unfortunately, only come to terms with this once their home has been foreclosed.
No Insurance For Natural Disasters Can Lead To Foreclosure
The mortgage must still be paid if a home is destroyed due to natural disasters like floods and earthquakes. Homeowners must ensure their most significant investment is insured against natural disasters.
FAQs Regarding Foreclosure In The U.S
Here are some FAQs that homeowners ask about foreclosures.
How Many Mortgage Payments Can Be Missed Before Foreclosure?
Lenders usually start a foreclosure process when a homeowner has missed about four mortgage payments (120 days). It is always best that the homeowner contacts the lender the first time a payment is missed.
How Do Foreclosures Work?
There are two kinds of foreclosure. Judicial foreclosures occur when a lender files a lawsuit against the borrower. This will result in the property being sold or auctioned. Nonjudicial foreclosure is when the lender gives the borrower a 30-day notice in writing to catch up on mortgage payments. If the borrower is unable to do so, the property will be sold.
If A Foreclosure Is In Process, Can It Be Stopped?
A home foreclosure can be stopped anytime until sold to a new party at an auction. Many homeowners often file for bankruptcy because it prevents the foreclosure process.
Is There Another Option Other Than Foreclosure?
Before the foreclosure process begins, the homeowner can contact the lender and ask for a Deed in Lieu of foreclosure. This is when the owner signs over the property to the lender. The lender can sell the property to recover the mortgage loan. Should the selling price be less than the original loan, the borrower is still liable for the outstanding amount.
Are There Other Ways To Avoid Foreclosure?
There are two other means to avoid foreclosure. The first is a loan modification. The lender must agree to adjust the interest rate, loan term, or monthly repayment. These adjustments can make it possible for the borrower to get and stay current on the mortgage payments. However, lenders are not obligated to do this, and the borrower may not be approved for a loan modification.
The other option is a short sale, when the lender allows the borrower to sell the property for less than the owed mortgage. However, should the house sell, the borrower is still liable for the deficiency balance left after the sale.
When Must A Home Be Vacated After Foreclosure
Once the foreclosure process is completed, the borrower will receive an eviction notice and be given a few days to vacate the property. It is essential that the borrower make sure that the property is no longer in their name and that it has been transferred to either the lender or the new owner. This is to ensure that the borrower is no longer responsible for the upkeep of the property.
When Do You Need Professional Help For A Foreclosure?
If the foreclosure is straightforward and the borrower has no other options, it is unnecessary to incur extra costs for professional help. But, consulting a foreclosure attorney should be considered if a borrower wants to file for bankruptcy, is in the military, or needs help with a loan modification.
Conclusion
Many homeowners in the U.S are faced with the possibility of foreclosure on their property because they cannot keep paying their mortgage. Most often, this is due to increased interest rates, a drop in property value, financial strains due to death and divorce, chronic illness, or job losses. Other contributing factors are homeowners spending more than they earn and getting into more debt.