Financial hardship often caused by increased expenses, loss of income, life changes and payment fluctuation are the leading causes of foreclosure. Whether an unexpected event or financial misstep prevents you from making your housing payment, foreclosure damages your credit and prevents you from getting another mortgage for years to come.
Lenders make loans based on your ability to afford payments when you buy or refinance the home. They calculate your income and assets to determine your income is sufficient and stable. Subsequent unemployment, loss of hours, a reduction in your pay rate or the loss of a seasonal or part-time job can hinder your ability to make payments as agreed and may lead to foreclosure.
The serious illness, disability or death of a household wage earner or borrower can prevent you from keeping up with mortgage payments. A divorce or legal separation can financially devastate a household as dual-income households become single-income and family support obligations render housing payments no longer affordable. An unexpected job relocation or transfer which requires you to move can also lead to foreclosure. When life changes occur and you can't recoup enough money by selling the home to pay off your mortgage, foreclosure may occur.
Changes in your loan payment can cause a once-affordable loan to become too much to bear. Mortgages that have an interest rate that adjusts after a specified amount of time may cause you to fall behind if the new payment is too high. Loans in which the lender qualified the borrower based on a higher income than he has or based on a temporarily-discounted payment can lead to foreclosure if the lender is unwilling to refinance or restructure the loan.
A home with equity can usually be sold to pay off the debt and avoid foreclosure. When a home's mortgage and liens exceed its value, however, the borrower may face foreclosure if he can't keep up the payments. Market shifts in which lower home prices bring down the value of your property and over-borrowing on the property can lead to negative equity. Unpaid homeowners association dues and unpaid property taxes may also turn into liens on the property title. Such encumbrances make it difficult to refinance or sell and create negative equity. Either circumstance can also lead to foreclosure.
Lenders make loans based on your ability to repay the debt over time, but certain circumstances which keep you from meeting your obligations can lead to foreclosure. Lenders call such cases extenuating circumstances -- isolated events beyond your control. As opposed to financial mismanagement, extenuating circumstances are unlikely to re-occur. Thus, they are looked upon more kindly when the borrower shops for a new loan after foreclosure. Extenuating circumstances include disasters such as tornadoes, tropical storms, hurricanes and floods, according to Freddie Mac.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.