Foreclosure: Understanding the Underlying Causes

We all know that foreclosures are caused by the default on the payment of a mortgage loan. Default of a monthly installment is primarily caused by a debt over-burden. Debt over-burden in turn is caused by a homeowner's over commitment to financial responsibilities. In other words, the home owner can't keep up with expenses, develops unsustainable debt and can't pay the mortgage. Understanding the underlying conditions that cause default is a key to effectively negotiate with home owners and initiate short sale transactions.

Underlying Causes of Foreclosure

Financial Slippage: This is the condition in which most responsible, smart and hard working individuals in foreclosure find themselves. We live in a capitalist society. This capitalist system creates more opportunities but it is also less forgiving. Long term un-employment is devastating to the middle class. So is the astronomical cost of health care. People in this category often resort to tapping equity in order to make ends meet. If matters do not get quickly resolved, the house becomes over mortgaged; they default and end up in bankruptcy. Foreclosure comes next.

Over-Indulgent Lifestyles: It is often that people live at or beyond their means. For these people, as soon as there is an income disruption, extra expense or similar event, mortgage payments become impossible to pay.

Interpersonal Problems: Usually divorce. No one wants to take responsibility for payments or one single income is insufficient to make the payments. Therefore they default.

Death or Incarceration: People in this category stop paying sooner or later. Even if payments are up to date and performing, title problems appear. Eventually someone decides that the banks should not be getting paid. Default soon follows.

Over-Optimistic Lending Practices: Often, in their quest to get commissions, mortgage brokers encourage home buyers to commit to the maximum mortgage payment level that they can possibly sustain. Usually the reasoning is that the property will go up in value and the home-owner will be able to refinance. It is not hard to find 100% financed houses in which dual income homeowners pay up to 50% of their combined income in mortgage payments. Needless to say, for these people just about any financial challenge will result in default and possibly foreclosure.

Mortgage Lending Fraud: This is often the result of mortgage brokers specialized in "sub-prime" lending. These brokers embellish the financial capacity of unqualified home buyers. The home buyers end up with high interest loans and usually higher payments than expected. The result is that the new homeowner defaults soon after buying the house.

Irresponsible Homeowners: These are people that are irresponsible with their personal finances and / or take advantage of the system. They do things such as abandoning the property as soon as they feel like it, or refinance the house in order get cash and let the property foreclose.

These are the primary underlying reasons for foreclosure. Often home owners in foreclosure fit into combinations and permutations of two or more categories at the same time. Knowing the underlying reasons for foreclosure greatly helps in understanding where the home owner stands.

Understanding the source of foreclosure, in combination with listening to the particular situation of each homeowner, allows the investor to effectively negotiate short sale purchases.

About the Author:
Oscar Morante is a full time real estate investor. He is primarily active in short sales. He teaches how to do short sales in his "Short Sales A to Z" seminar. This is an intense full day nuts and bolts seminar about the exclusive subject of foreclosure and short sales. To find more information visit www.bestshortsales.com.