The 2008 housing crisis was considered one of the worst economic crises in American history. Unfortunately, all too soon, the United States is dealing with another economic crisis — this one brought on by the COVID-19 pandemic. Due to the speed and severity of the virus’s spread and the resulting quarantine, many Americans find themselves out of work and facing financial conditions that they never expected. While those who were in good financial condition prior to the pandemic may have savings to rely upon, a lot of Americans live paycheck to paycheck and don’t have the savings necessary to pay their bills.
One particularly difficult aspect of maintaining your finances, of course, is paying your mortgage. And yet, millions of homeowners are suddenly faced with the reality of job loss and are uncertain about when (if ever) they will be able to reenter their fields. A lot of people may be faced with making permanent career shifts, which could impact their income and their ability to make regular mortgage payments. While the long-term impact of the pandemic is yet to be known, it’s almost certain that some people will be facing foreclosure on their homes in the future.
Although there are almost always multiple reasons for foreclosure, the pandemic crisis will likely push some households over the edge financially. What this means is that people who normally would be able to afford their payments but lack a financial “cushion” now have to take issues that normally wouldn’t put them in a financial crisis much more seriously.
Although there are sometimes options available to stop foreclosure, some of these options may not be enough for every household. However, homeowners should attempt to avoid foreclosure if at all possible. Not only is a home foreclosure traumatic, causing unexpected moves and financial hardship, but it will also have long-term effects on your credit score. Your credit could be impacted for years and will be difficult to rebuild. Loans are difficult to maintain for those with poor credit scores, which means that it may be difficult for you to buy a new house once you’re back on your feet financially and can better deal with payments. The loans for bad credit that you will be granted will likely have high interest rates, making them more challenging to handle.
While it may be difficult to handle foreclosure, you should remember that it’s important to avoid filing bankruptcy claims. Filing for bankruptcy could impact your credit even more negatively, with many claimants maintaining their bankruptcy filing on their credit history for up to 10 years. As you try to get your finances in order ahead of the long-term financial impacts of the pandemic, it’s important to understand the reasons for foreclosure facing Americans right now and consider which ones may apply to you in the future. That way, you will be better prepared able to tackle your challenges and avoid foreclosure.
Aside from job loss, which millions of Americans have now experienced thanks to COVID-19, there are other reasons for foreclosure. We’ll discuss three of the most common catalysts for foreclosure below.
1. Unexpected Deaths
Having a death in the family is always emotionally difficult to deal with. Unfortunately, there are also financial burdens that come with a death, especially if it was unexpected. A lot of people who die in their old age of natural causes have life insurance policies and wills to aid their loved ones financially. But those who die young or die of unnatural causes often, understandably, have not prepared. Even with a life insurance policy in mind, many families are still left with financial hardships following the death of a loved one.
After a loved one dies, your problems are not left at the funeral chapel. For one thing, funerals themselves cost money, with even smaller funerals sometimes costing thousands of dollars. The cost can be lessened through simple services or the avoidance of traditional funerals altogether. But this is often difficult for family members to deal with, especially if their loved one requested a specific type of funeral.
Funeral services aside, the next-of-kin is usually left with the bills that their loved one left behind. These could include medical bills, particularly during the pandemic when many people are dying after prolonged hospital stays due to COVID-19. You’ll also have to consider their other bills, including their debts. Tragically enough, one of the many reasons for foreclosure is the need to cover debts incurred by someone who is no longer present. This makes it even more likely for families to end up defaulting on their payments and facing possible foreclosure.
Of course, it’s important to remember that lenders would rather help you stop foreclosure and get you back on track with your mortgage payments, versus foreclosing on your house. Be honest when discussing this kind of situation with your lender. Oftentimes, when a loved one passes, a household’s income may actually be changed if that person was a part of the household. For this and other reasons, you could potentially negotiate a new payment plan with your lender that will better suit your new situation. This is sometimes referred to as a “foreclosure workout” and it should be considered before you make any rash decisions.
The pandemic is not only causing financial hardships but personal issues as well. Plenty of couples were already facing divorce prior to the pandemic, but forcing them into close quarters with their spouses for a sustained period of time may not help matters. With divorce cases come new financial difficulties, making divorce one of the main reasons for foreclosure. Although divorce itself can be expensive, considering the fees involved surrounding legal consultation and potential hearings in court, the fallout after a divorce can be even more financially devastating.
When a divorce occurs, assets are usually divided. Although some divorced couples may elect to continue making mortgage payments together, this can mean that one individual ends up with the entire mortgage payment (whereas they once made payments with the help of their spouse’s income). What was once a dual-income household is now a single-income household — with all of its financial implications. Furthermore, the process leading up to the divorce can often leave unresolved bills, including those for associated issues like relationship counseling.
There are other new financial obligations to consider when divorcing. Oftentimes, when children are involved, one party will be obliged to pay the parent with primary custody child support. Even if an individual already supported their child financially, this will go from being a part of regular expenses split between the couple to a set some paid every month. The emotional impact of this alone can be behind the eventual reasons for foreclosure. Maintaining mortgage payments may simply not seem worth it. However, it is much wiser to attempt to sell your home before defaulting on payments, choosing instead to downsize to smaller accommodations. While it might seem difficult to sell a house during a pandemic, it’s far from impossible — especially if you work with the right real estate agency. This is still an option even if you’re faced with foreclosure. Keep in mind that your lender will auction off your home anyway if a foreclosure occurs. You can offer what is sometimes called a short sale. If you’re given an offer on your home before it goes to auction, your lender must consider that offer. You’re essentially saving your lender time and money if the offer is reasonable, which gives them every reason to accept it.
While you may not love the idea of essentially doing your lender’s work for them and selling your home, it’s a much more appealing alternative than simply letting your lender sell the home themselves. Your credit won’t be negatively impacted as it would be if you allowed a foreclosure to happen and you’ll be able to move on to your new housing situation without as much hassle.
3. Medical Crises
Obviously, the presence of COVID-19 has caused many people to accrue medical bills that they did not expect. However, well before the virus made itself known, exorbitant medical bills were among the leading reasons for foreclosure cited by Americans. Whether or not you have health insurance, you’re probably dealing with financial challenges when attempting to pay for your medical bills.
Furthermore, some health problems may be more financially challenging to deal with than others. It’s one thing to have a surgery that you know is necessary and can schedule ahead of time. While this could still be quite expensive, you will probably be able to save for that surgery, which will at least offset some of the financial impact as you rearrange your finances. However, seeking urgent medical care during an emergency is another issue altogether. Going to the emergency room in itself is extremely expensive, often much more so than a simple doctor’s visit or a visit to an urgent care center. But it’s sometimes unavoidable. Even an ambulance ride costs thousands of dollars and depending on your insurance plan, you may very well end up responsible for it yourself. You simply can’t choose between survival and your financial well being, which is why these medical bills are so often reasons for foreclosure.
Your health can also impact your ability to work. Many people who are injured at work seek worker’s compensation, but they are either unable to receive it or find that it doesn’t cover what they thought it would. While some work injuries cause temporary issues, others may cause extended or even permanent damage. Losing your income is clearly among the major reasons for foreclosure — and this particular reason for losing your income can be accompanied by medical bills and no clear solution.
In some cases, two uncommon ways to stop a foreclosure called assumption and lease-option may be possible. These could be considered if you have a particularly pressing and unavoidable financial strain to consider like those surrounding medical bills. This would allow you to essentially transfer the loan to another buyer. As they would assume the loan, it would become their property and their responsibility. You would potentially be able to negotiate some kind of down payment from the buyer in order to pay off any outstanding bills owed to the lender. The lease-in option is similar, but in this scenario, the buyer would become your tenant and you would continue to own the house until the buyer saved up enough of a payment, sold their own home, or built up their own credit. This could involve a lump payment that you would use to bring your mortgage current; after that, the buyer would make monthly payments that you would use to continue paying your mortgage. But keep in mind that this would involve you living elsewhere, another expense to consider. Most of the time, mortgages now contain clauses that keep these options from being readily available. However, you may be able to negotiate with your lender in order to delete those clauses, should you have a potential buyer at the ready.
Although the reasons for foreclosure are vast and extend well beyond those listed above, the reasons for avoiding foreclosure are also varied. Right now, the homeownership rate is around 64.4%, according to the 2018 U.S. census. This means that there are a lot of people who may be looking at foreclosure in the future. However, if they did end up needing to foreclose, they would end up facing a future in which they might have to take out a costly loan for bad credit if they ever wanted to invest in property again or make a large purchase.
Sometimes, the reasons for foreclosure are insurmountable — and therefore foreclosure itself can’t be avoided. But if foreclosure can be stopped, you should do everything in your power to do so.