In a previous post, we talked about buying a foreclosed home in Austin. But as foreclosures continue to rise (according to the latest news from Bloomberg), I feel I should shift gears and talk about some of the leading causes of foreclosure ... in the hopes it will help prevent a few folks from becoming yet another statistic.
Definition of Foreclosure
Most of you probably know this, but we will start with the basics anyway. Basically, foreclosure is what happens when you can't pay your home mortgage loan and the bank takes over the property. It is a legal process in which the mortgage property is sold to pay the loan of the defaulting (non-paying) borrower.
Common Causes of Foreclosure
Obviously, the root cause of foreclosure is always the same. For one reason or another, the homeowner(s) is no longer able to pay the mortgage. But there are other common factors that lead to this, which we will discuss.
But how can somebody qualify for a mortgage and then be unable to make payments?
This is a common question, for which there are two common answers: either (A) the person's income or debt situation changed after obtaining the mortgage loan, or (B) the lender qualified the person for a subprime mortgage loan with risky conditions associated with it.
Sure, there are more causes than these two. But both the federal government and the mortgage industry have conceded that subprime lending is a big factor in the current spike of foreclosures.
To learn more about this, read my tutorial on the subprime adjustable-rate mortgage.
The best thing you can do to avoid a possible foreclosure situation is to buy within your financial means. Use a free mortgage calculator to break the sale price down into monthly payments, then compare those payments to your budget, your current expenses, etc. Don't overstretch yourself, and don't make the common mistake of thinking, "Well, I plan to make more money soon, so I can get by."
If you can't afford a certain level of mortgage today, you shouldn't plan on being able to in the future. There's too much uncertainty and risk in that line of thinking.
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