The Common Causes of a Foreclosure
The average home buyer cannot afford a home without taking out a mortgage. One of the key components of a mortgage is that the value of a home is used to secure the loan. If the mortgage borrower is unable or unwilling to pay the mortgage, the lender can foreclose on the home and potentially take ownership of the property. There are many underlying factors that can lead to home foreclosure.
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Unemployment
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Losing a job is a common cause of home foreclosure. People purchase homes under the assumption that their current income source will continue in the future or even increase over time. When an income source suddenly goes away due to unemployment, it can be difficult for a family to pay for a mortgage. Even if a family has saved money for the contingency of losing a job, savings can dry up before a new job can be secured.
Negative Equity
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Negative equity, also called being upside-down on a mortgage, occurs when the balance of loan exceeds the value of a home. For instance, if you currently owe $100,000 on your mortgage but the home's value has fallen over time to $80,000, you have $20,000 of negative equity. That is, you owe $20,000 more on the mortgage than the home is actually worth. According to "The Wall Street Journal," negative equity makes homeowners more willing to walk away from mortgages and let lenders foreclose on properties.
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Subprime Loans
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Subprime loans are loans made to people with low credit scores who are considered risky borrowers. Subprime lending is considered one of the most rampant causes of home foreclosures since the recession that began in the late 2000s. Subprime loans can have high interest rates that make it more difficult for borrowers to pay their mortgages and may be granted with minimal down payments, making it more likely that borrowers will end up with negative equity. Small down payments are another common cause of foreclosure.
Medical Expenses
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Unexpected medical expenses can put sudden financial strain on families which can lead to foreclosure and bankruptcy. Medical expenses are often given greater priority than paying mortgage: people can live without owning a home but they might not be able to function without medical care. Lack of health insurance can contribute to the hardship of paying for medical expenses, though even the insured may incur burdensome medical bills.
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