Lose Your Home: Lesser Known Ways

Half million dollar house in Salinas, Californ...
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Nowadays, we face a gigantic wave of foreclosures, the likes of which we haven’t seen since the Great Depression. Most of these foreclosures, maybe 99%, occur because the borrower did not make the mortgage payments, often over a long period of time.  When faced with a choice of making mortgage payments, paying property taxes or  homeowner’s insurance, many distressed homeowners don’t know which to choose.  Really, though, you can lose you home if you fail to pay any of these.

Let’s take property taxes, for instance. Most boroweers have impound accounts which collect a portion of the taxes and insurance each month and then pay them when they are due. If the borrower fails to make the mortgage payments, eventually the mortgage holder will pay the taxes and insurance and, of course, add the cost to the borrower’s loan.

But what if you don’t have an escrow account? In that case, failing to pay property taxes makes the taxes a lien against the property. This lien has priority over even the first mortgage. The tax assessor will inform the mortgage holder of the debt. With this information, the bank now has the right to foreclose as his secured loan is in jeopardy. Non-paid property taxes could become a huge burden on the property, eventually shutting out the lender. Before that happens, banks often foreclose.

What happens if you do not pay property insurance or fire insurance?  Again, the unpaid insurer will inform the bank. Insurance does not become a lien. But now the lender’s security for the loan is in jeopardy. What if the house burns down or suffers a major catastrophic event? The lender as well as the homeowner would have no financial protection. Unpaid insurance, then, will cause the lender to supply it by placing another policy on the property. The cost will, of course, be added to the loan and in this way become a lien on the property.

Reading you loan docs–boring, boring I know–brings many other surprises. If you allow the house to deteriorate, your lender has the right to foreclose. Or, if you make major additions or renovations without the lender’s “permission”, the lender has the right to foreclose. These, of course, are rarely if ever enforced, but do exist in most loan documents. Very few homeowners, I would hazard, run to get their lender’s permission to add a bathroom or renovate the kitchen.

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