how does a falling economy cause people to default on their house mortgages, if their loan amount and income stay the same?
In: Economics
For every default on a mortgage, there’s an individual reason. This isn’t a topic that can be summed up with one answer.
I’ll give you the example of my wife and me, since we fit the parameter of the loan amount and our income staying the same:
We bought our first house in 2006 with plans to start our family, build some equity and eventually move a few states away to be close to family. Then the housing market collapse of ’08 happened. The value of our house dropped to almost half of what we initially mortgaged it for. We both still had our jobs, our mortgage was a fixed-rate, and we bought within our means, but we were stuck in a tiny house that we owed way more on than it was worth, with two kids, and two states away from where we wanted to be.
The only way the bank would allow us to do a short sale (selling for less than current value) was to be in default on the loan, so we stopped paying the mortgage. Within a couple of months we were in default, and we were able to easily sell the house through a realtor who specialized in short sales.
It screwed our credit for a few years, but it was a small price to pay for getting out of that money pit, and we’re so much better off now than we would have been had we stayed there.
Latest Answers