The Top 8 Reasons Homes Go into Foreclosure
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Foreclosure is currently a threat to more American homeowners than it has been in the past. In October 2021 alone, there were 20,587 foreclosure filings nationwide — more than double the number of filings in September of the previous year.
While various circumstances can lead to foreclosure, there are several actions that homeowners can take to avoid the financial devastation that a foreclosure brings. If you find yourself at risk of foreclosure for any of the eight common reasons described below, try to remain calm and consider your options.
No matter how well a person manages their finances, the unexpected loss of a job throws a wrench in even the best-laid plans. Unless a homeowner has a significant amount of money saved before becoming unemployed, it can be impossible to stay current on mortgage payments without a steady source of income.
Unemployment isn’t always a death sentence for homeownership: Many lenders will agree to forbearances that temporarily pause or lower mortgage payments while the borrower searches for a new job. However, even with a forbearance, any missed or reduced payments will need to be paid in full eventually, and many homeowners find that they can't catch up even after they've become employed again.
The good news is that homeowners who are still struggling to make mortgage payments after securing another job may qualify for a loan modification if they have enough equity in their home. While loan modifications are not available to all homeowners and may negatively impact your credit, they can effectively prevent foreclosure by reducing the loan’s interest rate or lengthening its term.
2. Serious Damage
Much like unemployment, events causing major damage to a home — such as natural disasters like flooding and serious events like house fires — can come suddenly and without warning. Take the aftermath of 2017’s Hurricane Harvey. Before Harvey, the average number of foreclosures in the Houston area was approximately 600 a month. In the year following the hurricane, foreclosure rates ranged from 700–1,800 a month. That means, in some months, foreclosure rates were three times as high as usual.
For many of the homeowners affected by Hurricane Harvey, what led to foreclosure was a lack of insurance. Paying for extreme damage out of pocket is not possible for many people. Even homeowners who do have insurance, sometimes find that the amount covered by their policy is not nearly enough to pay for the repairs needed. While some homeowners may receive a better insurance payout with the assistance of a public adjuster, this is still not always enough to make ends meet.
Homeowners in this unfortunate position are usually better off selling their damaged house to a cash buyer like AMI House Buyers. While this solution will not enable them to stay in the home, it will prevent a foreclosure, which would damage their credit.
3. Increased Home Expenses
It’s not uncommon for someone to buy a home that’s within their budget, but after living in the house for many years, the home’s value increases as the market becomes hotter. While their mortgage payments remain the same, other expenses such as property taxes, insurance, and HOA dues can all go up significantly, making it impossible to keep up. This can put the homeowner at risk of foreclosure.
While HOA dues are usually non-negotiable, there are ways that a homeowner may be able to save on taxes and insurance. A loan modification can lower insurance premiums and/or spread out mortgage payments to reduce their loan’s principal, which can compensate for the increased property taxes.
A homeowner struggling with higher taxes can also research whether they can benefit from any property tax exemptions, such as homestead, veteran, or disability exemptions. For instance, Texas residents with a homestead exemption cannot have their assessed tax value raised more than 10% in any year.
4. Inadequate Budgeting
When establishing a budget, many home buyers forget that their budget should cover all expenses associated with a home, not just the mortgage itself. This includes the regular costs discussed above and the various repairs that most homes will need at one point or another. When a home’s listing price is just barely within budget, that means there is hardly any money left over for when an appliance fails or the roof develops a leak.
A person preparing to buy a house should bear in mind that the average cost of upkeep each year ranges from 1%–4%, with older homes costing more to maintain than newer ones. Of course, this knowledge may not be enough to help a person budget effectively once they have already bought a house.
Underestimating the actual cost of a home is a common mistake. Taking out loan after loan without any way to pay them back only worsens the problem. The sooner a homeowner accepts the reality that they are in over their head, the sooner they can start looking into solutions like making arrangements with their mortgage lender or selling the home.
When married couples buy a house together, the expectation going in is that there will be two sources of income to cover all the necessary expenses. However, that plan goes out the window when that couple gets a divorce. And the less amicable a breakup is, the messier things can get, and sometimes both partners’ credit and finances can get damaged in the process.
For the average divorcing couple, the expense of maintaining two households, where previously there had been only one, is a financial challenge even in good times, and that ups the odds of facing a foreclosure. There are also many instances of spouses withholding mortgage money out of revenge. Therefore, it’s always best for both partners to agree on how to handle the mortgage until the divorce is finalized and the house can be sold, if necessary.
Suppose one spouse stops contributing to household expenses because they no longer live in the home. In that case, the other spouse should consult with their attorney to see if they can force the other spouse to contribute. Sometimes, this can be done with a temporary court order until a final decision on what to do with the house can be made.
6. Medical Bills
Medical issues like unexpected illness or injuries are yet another unpleasant surprise that can take an immense toll on a homeowner’s finances. In addition to high medical bills, many homeowners with health problems may find themselves either temporarily or permanently out of work, leaving them incapable of paying their mortgage.
If a sick or injured homeowner has enough home equity, they may qualify for a loan modification. But if they do not meet the requirements, filing for bankruptcy is an alternative option that may enable them to keep their home. Homeowners in this situation should reach out to a bankruptcy lawyer to learn more about what bankruptcy would mean for them and determine whether or not it would require them to sell their home.
Much like a divorce, the death of a homeowner could mean the loss of income contributing to the mortgage, and in some cases, it may have been the only source of income. While federal law dictates that whoever inherits the deceased's property is allowed to assume their mortgage, continuing to make monthly payments is easier said than done if the house is outside of the inheritor’s budget. The home may also need to be sold if the original homeowner had debts, and the house must be liquidated to pay off those debts.
The inheritor may not want to go through the trouble of selling the home, especially when they are overwhelmed with the grief of losing a loved one. If the house is in bad shape, they may decide to let the bank take the property in foreclosure. This is an understandable course of action if there is no money to be made from selling the house. But before “letting the house go,” the inheritor must find out from their attorney how this decision will impact their own credit.
Sometimes, inheritors can't afford to continue making the mortgage, property tax, and HOA payments while the estate is being settled. In these cases, they may be better off selling the home quickly as-is to a cash buyer like AMI.
8. Not Attempting to Sell
If an owner can no longer afford their home and it's in suboptimal condition — whether due to poor upkeep or a natural disaster — they may assume that it isn’t worth the bother of selling because they will lose money in the sale.
Sometimes homeowners wait to long to deal with the situation and find they've run out of time, leaving them fearful they may not be able to sell the home on the standard market in enough time to beat their foreclosure clock.
The sooner a homeowner accepts the need to sell a home they can no longer afford, the better they'll fare in getting all of their equity out of the home. Finding a real estate agent experienced in quick sales, in addition to the foreclosure process specifically, will be key in liquidating the home successfully on the standard market.
Facing Foreclosure? We Can Help
However, just because the home is not desirable does not mean that no one would want to buy it. If you're at risk of foreclosure and need to sell your home quickly, let AMI help solve your problem. We buy homes in all conditions and would be happy to take the house off your hands, saving you from foreclosure and the damage it would do to your credit. Contact us today for a no-obligation cash offer.