If you live in any one of the 50 states impacted by the recent mortgage crisis, you may have noticed a large upswing in the number of “for sale” signs in your neighborhood. Many of these homes even have a foreclosure or bank-owned sign in the front yard. In February 2011, approximately 1 in every 577 homes in the United States was issued a foreclosure notice, with worse statistics in many states such as Florida, Michigan and Nevada. This is a staggering number that has reached a new record in many metropolitan areas.
For many people, numbers such as these beg the question, what causes house foreclosures? Unfortunately, there isn’t a simple answer. The reasons leading up to a house foreclosure are as increasingly complex as the economy they dwell in. However, there are certainly a few common situations that either alone or in combination can cause house foreclosures in the United States:
- Unemployment. The current national unemployment rate is 8.9 percent, and has reached double digits in many states. Due to the declining economy and rise of overseas outsourcing, many homeowners have been laid off and are unable to afford their monthly mortgage payments. This leaves their mortgage in default status, and eventually causes the bank or lender to reclaim the property.
- Property value decline. Due to the recent mortgage crisis and economic recession, there has been a surplus of available properties and few buyers eligible to purchase them. This has caused many homeowners to lose property value in the double digits, some as much as 50 percent. In effect, many have become “underwater” on their mortgage, meaning that they owe the bank more money than the property is worth. This uncontrollable situation has left many homeowners feeling helpless and resorting to selling their homes either “short” – for less than the amount owed – or letting the bank foreclose on the property.
- Neighborhood quality decline. Due to drastic property value declines of 20 percent or more, many underwater homeowners who need to move and choose not to short sell or foreclose on their properties have chosen to rent them out instead. This has brought in a number of young families, college students and low-income renters to neighborhoods that used to contain all middle-class homeowners, increasing the amount of gang-related activity and graffiti, and resulting in an overall neighborhood quality decline in some areas. Homeowners who remain in these areas may want to move, but are unable to sell, leading them to eventually foreclose or sell their homes for less than the owed value.
- Interest rate increase. Prior to the mortgage crisis, many homeowners took loans with adjustable rate mortgages (ARMs) that may increase over time. For some borrowers, their interest rate hike equates to hundreds of extra dollars they have to pay on their mortgage each month. Many homeowners can no longer afford their monthly payment once the higher interest rate kicks in. Some of these homeowners are able to refinance to save a home from foreclosure, but many others are not so lucky.
- Tax or HOA fee increase. In most metropolitan areas, taxes have been increasing yearly. For a homeowner who purchased 20 years ago, there may have been a double digit tax increase in the time since they bought their home. As a result, they may be unable to afford to pay their increased property tax. Likewise, homeowners with a variable or ever-changing homeowners association (HOA) fee can feel the pressure of added expenses. This scenario is very common in Florida in recent years, as vacant or foreclosed condominiums are on the rise and year-round homeowners are expected to pay a higher HOA to cover the difference in property maintenance fees.
- Poor money management. Many homeowners are simply poor at managing their money. Issues such as retail, drug/alcohol or gambling addictions can make homeowners unable to meet their monthly bill obligations and can be an underlying factor in what causes house foreclosures.
- Death or illness. In many instances, the illness or death of a family member can significantly impact the household income due to medical bills, lost wages or funeral expenses. Many of these people may be unable to afford their mortgage payment and fall into default status on their home loans.
- Divorce. If a husband and wife divorce, either party must “buy-out” or move from a dual-earning household to a single. In this scenario, they may no longer be able to afford their monthly mortgage payment on a single salary alone. If they are unable to sell due to a surplus in housing or underwater mortgage, they may resort to foreclose on their house.
How Can I Save My Home From Foreclosure?
Many homeowners may be wondering, how can I save my home from foreclosure? There are a few options available to homeowners at risk for default on their loans. Some homeowners may qualify for HUD foreclosure grants. Another possible solution is to refinance to save from home foreclosure. Refinancing can provide a lower interest rate that the homeowner may be able to afford long-term. If refinancing is not a possibility, another option may be to short sell the property. Short selling, or selling for less than the amount owed to the lender, is still damaging to a homeowner’s credit but has less impact on the credit score than a foreclosure. With a short sale, a person may also have the ability to buy a house sooner in the future. For more information on short sales, see the article entitled “What Does Short Sale Mean?”
Each homeowner has a unique financial and personal situation, and the decision to foreclose on a house that was once considered a home can be a difficult decision for many people. Understanding what causes house foreclosures can help homeowners avoid these scenarios and may ultimately help save a home from foreclosure.