How Do People Paying Their Mortgages Lose Their Homes?

Published by julia | Filed under Buyer / Seller Tips, Real Estate, Shout Outs

When it comes to real estate foreclosures many people believe the only reason a home is foreclosed on is because the homeowner was not paying their bills.  The fact of matter is that many foreclosures have nothing to do with paying on time and more to do with the value of your home.  With the drop in the sub prime market, home values lower dramatically.  As the value of a home lowers in a certain area, eventually a home may be worth less than the mortgage taken out on that home.  When the mortgage value of the home falls below the amount of money owed on the mortgage, the bank has a legal right to demand the difference between the value of the home and the total price of the mortgage.  For families who are paying their mortgage on time and even borrowed at a fixed rate so they would not have to worry about a rise in price, if their home value reduces by $100,000 and the mortgage instantly beomces $50,000 more than the home is worth, the bank can demand than $50,000 in the form of a lump sum or as an additional payment added onto the current mortgage.  With an additional $50,000 in debt, many families can no longer pay the mortgage payment and the home is foreclosed on.

Another way a home can be placed in foreclosure is in a new construction area.  If a builder sells model A for $250,000 because that is the value of the home at the time of the sale and then the model home price is lowered to $200,000 within a small amount of time after the initial sale, the homeowner who purchased model A for $250,000 is now holding on to a home worth $50,000 less than their mortgage.  Again, as in the first example, the bank has a legal right to demand than $50,000 due to the instant depreciation of the home.

While some of the mortgage foreclosures will be due to the adjustable rate mortage payment rising above the monthly payment a homeowner can afford, some of these foreclosures are happening to families who were paying their mortgage on time each and every month since inception of the loan.  Not every mortgage foreclosure will be caused by a homeowner not paying the monthly mortgage.  Some will actually occur in families with the drop in the sub prime market. The implosion of the real estate value market has actually caused such an equity depreciation in their home that their mortgage is worth more in their home’s value.  When the mortgage is more than the value of a home, the bank does not like to hold on to the mortgage and will often demand the money leaving the family in a foreclosure status.