Foreclosure is the process by which lenders recover a loan by repossessing the property that the loan was for and reselling it to recoup loss. A lender has the legal right to foreclose a home when a borrower fails to make mortgage payments over an extended period of time. Here is a look at some of the most common causes of foreclosure.
Did you know that the vast majority of foreclosures are caused by negative equity from price declines? Negative equity occurs when a home’s value falls, causing the homeowner to owe more on the mortgage than what the home is worth. (This is also referred to as being “underwater.”) When negative equity happens, a homeowner’s best options are usually to refinance, if possible, or sell.
Rising Interest Rates
Some foreclosures can be attributed to subprime mortgages, which see low introductory interest rates initially, only for those rates to reset at incredibly high values a few years later. This can easily make it difficult for homeowners to keep up with mortgage payments. Homeowners with lower credit scores also happen to be the main recipients of subprime mortgages, further complicating things.
The Five D’s
There are several personal scenarios that can ultimately lead to foreclosure as well. Five of these scenarios are commonly referred to as “the five D’s.”
Death: A death in the family is a leading cause of foreclosure, particularly when it happens to be the head and primary breadwinner of the household who passes.
Divorce: Oftentimes divorce means that one person is designated as responsible for making mortgage payments. This can put financial stress on the individual making mortgage payments, especially if there are missed spousal support payments. The stress that the divorce process brings (both emotional and financial), along with impaired communication, can also mean missed mortgage payments.
Drugs: Substance dependence and addiction affects individuals from every walk of life, and if the problem becomes great enough, financing drugs and alcohol can easily take priority over making mortgage payments.
Disease: Unexpected medical bills are the leading cause of bankruptcy in the U.S., so it makes sense that they would lead to foreclosure as well. Chronic illness, catastrophic emergency, and inadequate health insurance can all create financial stress that ultimately means missing mortgage payments.
Denial: Finally, there is denial. A variety of factors can come together to put a person in financial stress, and denial can keep that person from recognizing that their current lifestyle is not compatible with keeping up with mortgage payments.