With the press full of more bad news about defaulting homeowners and a rise in foreclosures, the question most people ask me is: “Jeff, how do people get into that state in the first place?”
Being a real estate expert who has seen foreclosures close up I can tell you that a foreclosure is never the result of a single incident. It's never, for instance, a case of a little bad luck, the loss of a job, a car accident or some ill health. These are deplorable situations to occur, to be sure, but on their own they are never enough to take a homeowner who has purchased his dream property, down.
What usually happens is that homeowners who end up facing the dreaded prospect of a foreclosure have consistently boxed themselves in, closing their prospects and notching up debt through the consistent use of credit to finance debts. This is a case of “robbing Peter to pay Paul” and the scenario, all too familiar goes a little like this:
The homeowner boxed into a financial corner, rather than thinking of how he can reduce outgoings and perhaps downsize his lifestyle until his financial condition improves, he chooses to take out a second and maybe even a third mortgage and release equity stored up in the house.
Now there's nothing wrong in doing anything like this. Equity stored up in a property could be released which means that it can, if used properly, save a house owner in trouble. The problem is that house owners forced to release the equity in their homes very rarely manage to use this facility properly. Feeling a certain sense of desperation, they leave it too late to shop around for credit, fail to look at the fine print and feel incapable of negotiating with the lender. As a result they get locked down into second mortgages which hit them with hefty interest rates after a brief honeymoon period which usually lasts between six months and a year.
The increased payments the homeowner then has to make put him back into the same situation he was in before he took out the loan. He then gets into a greater panic and is forced to take out another loan from an ever shrinking number of choices which leaves him in the worst possible financial bargaining state. Next is a story that's pretty much foreclosed and inevitable.
The tragedy is that a little careful planning here could possibly have averted the worst as the fine print would have revealed it early enough for the homeowner to either avoid getting the loan or making an adjustment in order to meet the higher cost. So, the lesson is when it comes to credit, the fine print is all important.