Foreclosure is a legal process in which the lender attempts to recover the balance of a loan from a borrower who failed to make mortgage payments, forcing the sale of the asset used as collateral for the loan. Usually, a notice of foreclosure is being sent to the borrower if they failed to pay their mortgages after 90 days, even more depending on the agreement with the lender. There are several reasons why homeowners failed to pay their balances; lost their job, sudden changes in financial situation among others.
Justin Pritchard of The Balance explained thoroughly the foreclosure process and how and why it happens. Read the article below to know more about foreclosure.
Foreclosure Explained: How and Why It Happens
Foreclosure is the process lenders use to take property from borrowers. By taking legal action against a borrower who has stopped making payments, lenders try to get their money back. For example, they take ownership of your house, sell it, and use the sales proceeds to pay off your home loan.
How Foreclosure Works
When you buy expensive property, such as a home, you might not have enough money to pay the entire purchase price up front. However, you can pay a portion of the price with a down payment, and borrow the rest of the money (to be repaid in future years).
Homes can cost hundreds of thousands of dollars, and most people don’t earn anywhere near that much annually. Why are lenders willing to offer such large loans? As part of the loan agreement, you agree that the property you’re buying will serve as collateral for the loan: if you stop making payments, the lender can take possession of the property in order to recover the funds they lent you.
To secure this right, the lender has a lien on your property, and to improve their chances of getting enough money, they (usually) only lend if you’ve got a good loan to value ratio.
Consequences of Foreclosure
The main problem with going through foreclosure is, of course, the fact that you will be forced out of your home. You’ll need to find another place to live, and the process is stressful (among other things) for you and your family.
Foreclosure can also be expensive. As you stop making payments, your lender will charge penalties and legal fees, and you might pay legal fees out of pocket to fight foreclosure. Any fees added to your account will increase your debt to the lender, and you might still owe money after your home is taken and sold if the sales proceeds are not sufficient (known as a deficiency). See full post here…
Foreclosure does not happen overnight. Lenders actually have the patience to wait for the borrower to pay their balance. Most of the time, their homes cost around hundreds of thousands of dollars, and a lot of homeowners don’t earn anywhere near the amount they borrowed annually. That’s why they run into lenders and part of the loan agreement is that the house serves as collateral for the loan. This means that homeowners give the lenders full authority of the house.
Chris Lee Law Firm also listed the top causes for foreclosures. Check them out for you to know the reasons why a lot of people failed to settle their mortgage obligations.
Top 7 Causes for Foreclosures
Though the United States is recovering economically, millions still face the ultimate American nightmare: foreclosure. Regardless of income level or neighborhood, foreclosures can happen anywhere and affect anyone. The process begins when a homeowner begins missing their mortgage or loan payments and their lenders make legal moves to repossess the property to recoup lost funds.
Some individuals decide to file for a Dallas bankruptcy to avoid foreclosure. However, being aware of the top 10 foreclosure pitfalls can help you avoid both situations altogether. Reasons people fall behind on their foreclosure payments include:
- Adjustable rate loans. Many homeowners are tempted by the low payments and interest rates, but are caught off guard once the cost accelerates alongside the interest. When they are buried under unbearable debt, they are faced between filing for a Dallas bankruptcy or foreclosure.
- Unemployment. In this shaky economic recovery, layoffs can come unexpectedly. Since most Americans don’t have enough in their savings accounts, sudden job loss can become a cause of foreclosure.
- Credit card debt. More than half of the population has credit card debt. When the debt is uncontrollable, some people are faced between missing their credit card payments or their mortgage payment. In the end, many escape a Dallas bankruptcy only to file for foreclosure.
- Medical expenses and illness. Medical reasons are the cause of 13 percent of foreclosures nationwide. Whether it’s the added stress of medical bills or the loss of a job due to sickness, illness plays a major role in both forecloses and the decision to file for a Dallas bankruptcy.
- Divorce. At the end of the relationship, the heightened emotional state and legal proceedings can make it easy to ignore financial issues. Suddenly, divorced individuals realize that payments have been missed and that neither party can shoulder the bills on their own.
And those are the most common reasons why homeowners failed to pay their mortgages on time. Higher loan rates, too much credit card debt, sudden unemployment, emergency medical expenses are very valid reasons as to why homeowners had to skip paying their mortgages on time. Doing these for the next couple of months and expect a notice from the lender reminding you to pay your overdue balance.
While there are reasons why foreclosures happen, there are also reasons for homeowners to completely avoid foreclosures, and Kieran Jackson wrote an article about this topic in BiggerPockets.
10 Reasons for Homeowners to Avoid Foreclosure
As investors, and as real estate agents, many of us often come across homeowners that are in distress and facing foreclosure, and they just don’t know what to do. Here are ten reasons you can share with these homeowners and to why they should be proactive and put everything they can into an effort to AVOID FORECLOSURE!
1. Foreclosure Follows You – Homeowners will always have to disclose that they have had a foreclosure on any mortgage application and many job applications that they submit in the future. This can have an adverse affect on their future mortgage rates. This is a credit item that is asked about specifically in credit inquiries. There is no seven-year time limit on this item.
2. Credit Score Negative Impact – Credit scores will be lowered by 300-plus points (per loan). Along with bankruptcy, a foreclosure is one of the most devastating credit issues you can have in relation to future credit availability.
3. Ineligibility for a Government Insured Loan – The homeowner will be ineligible for a a government insured loan for 5-7 years (only two years in a short sale). A foreclosure is the one credit report item that is almost impossible to have repaired.
4. Possibility of Deficiency Judgment – Your lender can seek a deficiency judgment against you and collect any amount they do not recuperate at trustee sale.
5. Negative in Employment Credit Checks – Many employers run credit checks on prospective employees. Foreclosure is one of the top items that will put a potential new hire in jeopardy.
Those are indeed, very important reasons why homeowners must avoid foreclosures at all cost. Sudden changes in finances, becoming unemployed among others are really distressing, but they must find ways to settle their obligations and avoid foreclosing their homes.
If you are a home buyer, you can find lots of awesome good deals in foreclosures, and Dependable Homebuyers can help you find great deals in foreclosures. To know more, visit us at https://www.dependablehomebuyers.com and we look forward to hearing from you.