If you are a few months behind in your mortgage payments, you may be worried that you’ll never catch up, thereby causing the bank to foreclose on your beloved home. We’ve seen this quite often within the past 3 years, and it truly is a sad situation. No one intentionally withholds their mortgage payments from the bank. Most often, the lendee just can’t come up with the money because of an unfortunate situation. This could be due to theft, job loss, or maybe a decrease in wages. Whatever the reason may be, no one wants to be in a foreclosure scenario.
In our recent economic slump, not only has money been a little tighter, but the value of houses has taken an obvious hit as well. In many areas of the U.S., the housing market is now valued at half of what it was in late 2006. So, here is where the problem begins. For the people that purchased their homes in the early 2000s, they most likely have not paid much toward their principle, leaving the majority of their loan to be repaid. Since the value of the house is much less than when they purchased it, they now owe more to the bank than the house is even worth. So, if they sold their house, they could give the bank all the money from the sale, but still owe the bank more money!
Let’s look at an example. Let’s say Bob bought a house in 2005 for $250,000. In the past 5 years, Bob has paid down his principle by $15,000, leaving him with $235,000 to repay on his loan. Bob’s house was recently appraised at $175,000, a 30% loss in value from 2005. If he were to sell his house today, he would still owe the bank $60,000. He now feels trapped in his house, and even though he might be able to meet his payments every month, he still is not at all enthused about his current situation.
I have witnessed many scenarios like the one outlined in the above paragraph. The sad thing is, I have spoken with people that have actually walked away from their house because of its loss in value. They may have only missed one or two payments, but because their investment was not increasing in value, they just decided to abandon the property and live in a rental. Isn’t that unbelievable? Homeowners just expect that the value of their homes will go up, and when it does not, they don’t know what to do. However, these same individuals, when putting money in the stock market, hold onto a losing stock because “it will most likely rise in value again.” It boggles my mind….maybe it’s just me.
Because of the downturn of the economy, the equity that you once had in your home may be gone, but DO NOT allow the bank to foreclose and DO NOT abandon your home. In case you were wondering, both of these actions will hurt you in the same way. Your credit score will decrease severely (typically by 150-200 points) and it will say on your record for up to seven years! This pretty much means that you’ll either be renting an apartment or living in your parents’ basement for a long time before you’ll ever get a loan for another house.
If this isn’t bad enough, if your house is foreclosed on by the bank and sold for less than the amount you owed, you may still owe the bank the difference!! Each situation is different, but this indeed does happen! And, if this is not the agreement, then most likely the difference between the home sale and your delinquent debt will be counted as income! For example, if you owed the bank $100,000 and your foreclosed home sold for $70,000, you got out of paying $30,000. This can be recorded as “income” by the bank and when you file for taxes the following year, you will find a 1099 in the mail with those earnings. You now have to pay tax on those “earnings”. If this is not clear, take a look at the article written by Dwan Bent-Twyford, “Do Homeowners Still Owe Money After a Foreclosure?”
For those of you who are not in a foreclosure situation, do everything in your power to keep it that way. Get yourself out of debt and increase that emergency fund. You never know what life will throw at you, so be prepared for anything.
If you are currently facing financial challenges and are having difficulty paying the mortgage, read my articles on saving money and getting out of debt. You may need to get creative, but there is always a way out, you just have to find it.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.