The Seven Deadly Sins: Warning Signs That Lead to Foreclosure4 min read
1. Buying too much home. You fantasized of the day you could buy the home of your dreams. The home has everything you wanted or imagined. It’s in a great neighborhood, great schools, super amenities and you beam with pride when you receive visitors. You are envied by family and friends alike. Everything seems perfect, but is it really? You just moved from an apartment or a smaller less expensive home. You figured you can handle an additional $700 monthly. One problem with a bigger home is bigger upkeep and utility cost. The utilities alone could add an additional $400-$500 monthly that you had not anticipated. Possibly you had not thought about HOA fees that are due annually. Many homebuyers make the mistake of being emotional when making a home purchase. Count the cost first, then determine if you can really afford the home you’ve dreamed of. You don’t want your dream home to become a real life nightmare.
2. Going into a home “house poor”. You saved for the down payment and all closing costs. You paid off creditors to boost your credit scores. You emptied your retirement or 401K to come up with all the funds necessary to get into the home. Moving can be expensive and you just had to purchase appliances for your new home. Okay, you did it, you got the home but now you have very little or no money left in your bank account. Here is the problem, you just moved in and you’ll have to live paycheck to paycheck. The utilities will come due soon as well as the mortgage payment and you don’t have additional resources. What if your car breaks down, you lose your job, or some other unanticipated situation occurs? Your best bet is to save at least 4-6 months of mortgage payments when you are considering a home purchase.
3. Depending on a second job, spouse’s income, or inconsistent income. If you need a second job to be sure you can make the mortgage payments, you’re doin’ it wrong. If you have to depend on getting overtime to make your mortgage payments, you’re doin’ it wrong. If your spouse must work so you all can make the mortgage payments, you’re both doin’ it wrong. Maybe you have a commission based income. What if the company cuts back on overtime or eliminates it altogether? What if the second job is becoming unhealthy for you? What if your spouse loses their job? Any and all of the preceding scenarios could happen. When you are considering your home purchase, only account for the income you earn without overtime, second job, or spouses income. If you don’t have to depend on the extra income, your quality of life will improve and you will truly enjoy your new home.
4. Not escrowing taxes and insurance. In a perfect world the 80-20 loan was a dream come true. In 2004 when I was selling homes for a production builder the one item pushed more than any other was the 80-20 loan. The 80-20 loan works like this, 80% of the loan is amortized for a 30 year term like a traditional mortgage. The remaining 20% is a separate loan usually at a higher interest rate. The loans run concurrently but the 20% portion falls off after 15 years. The benefit was that it allowed homebuyers the chance to buy more home. The 80-20 allowed homebuyers to pay their taxes and insurance on their own which allowed for a more manageable monthly mortgage payment. Okay this is where it gets dangerous, YOU must pay the entire tax bill at the end of the year. You must stay current on your insurance. If you don’t pay your taxes, you could lose your home to foreclosure. I have found that only 25% of homebuyers who did a 80-20 were successful, the other 75% lost their homes in most cases. Go with a traditional mortgage and keep your home.
5. Not paying on time. A mortgage works off of momentum. The longer you pay the more you pay. The danger of not paying your mortgage on time is that once you miss a payment, you are 40% more likely to miss a second payment and 75% more likely to miss a third. Why? Most people live paycheck to paycheck and don’t have several months of mortgage payments in the bank. By the way, when you miss the third payment you’ll be getting a certified letter in the mail notifying you of foreclosure proceeding. Don’t miss a payment! Do what you must, but don’t push a mortgage boulder down a hill.
6. Paying a high or adjustable interest rate. Just say NO! Adjustable rate mortgages are probably responsible for the majority of foreclosures. If you are offered a higher than normal interest rate on a home, don’t let your emotions make your decision. Stop, strengthen your credit and try it again. A lot homebuyers were tricked into doing adjustable mortgages. Homebuyer were told they could easily refinance later, it never happened and when the interest rate got too high, they lost their home.
7. Ignoring the lender. Here’s the deal, you’re behind on your mortgage. You avoid your lender’s attempts to contact you. Do not cut off communication with your lender. Communication is the key if you want to work out a strategy to keep your home. The lender does not want your home. Most lenders lose $50,000 on average when a home goes to foreclosure. Explain to the lender what’s going on in your life. Whether it’s a job loss or something more personally catastrophic, you can probably work out a way to keep your home. Remember, a silent voice gives consent.