Can a Bad Credit Score Make You Homeless?
There is a symbiotic relationship between a mortgage and the credit of an individual. Most of the time, if a person is having trouble paying back a mortgage, that person will normally have a bad financial record. For the most part, people have their net worth tied up in their place of residence, and the health of that banking transaction reflects on the overall financial health of the individual.
The question of bad finances being enough to take someone's house is quite a complicated subject. It is political as well as economic, and it also has to do with the financial savvy of the borrower. Here we will go over a few of the most important connections between the mortgage payment and the overall financial health of the average person.
First of all, people who use their house as an investment are much more likely to have bad credit.
Unless an individual owns more than one place of residence, there is truly very little breathing room between the mortgage and the finances of a homeowner. Although the equity of a home may fluctuate depending on the whims of the market, for the most part, a house is meant to be a livable asset, not a means to further lines of financing or other financial vehicles. Most of the time, the reason that people are taking out second mortgages is to help pay off the first mortgage, not for the reasons that the commercials say: expansion of a business, furthering education, or providing for a child.
With the statistics against you if you tried to use your home as an investment, you should try to avoid leveraging your equity or your mortgage for cash or more lines of credit. This is the first step to connecting bad credit and a mortgage to closely. If a borrower reneges in this situation, then missed payments may certainly cause a bank to begin a foreclosure proceeding on a home.
The recent banking and housing prices of 2008 turned this entire notion of mortgages and bad credit on its head, however. Many people who had completely lost all of the equity in their homes and were underwater in terms of value were helped by the government in order to save the overall economy. Because most of those borrowers had actually bought more house than they could afford, the result in a true market situation would have been homelessness in that situation. However, the lender of last resort, the government, stepped in and saved many of the homes that would have otherwise been foreclosed upon.
This set a precedent that opened up an entirely new world in the market for mortgages. Many banks were found to have traded mortgages overseas to other banks in order to divert their risk. Banks were foreclosing on pieces of property that they no longer had the physical the two. Many of these financial institutions were called out by members of Congress, and they were actually unable to enforce their own foreclosure proceedings. This gave the borrower more leeway when it came to connecting the long-term financial score and mortgage payments.
Politics aside, the long-term financial score itself can only make the situation worse when it comes to paying down the mortgage. Whether it is the cause of homelessness is an amalgamation of many financial factors, all of which have to do with the initial long-term finance report, but none of which could cause homelessness on their own.
Let's take a look at some of the factors that can change based on a bad long-term financial report in order to see how closely homelessness and bad long-term finances are related.
- High interest And Insurance Payments
A bad long-term credit report will cause financial lenders to view a borrower as more of a risk. Higher risks meet higher interest rates on big-ticket items such as a house. Half a point on an interest rate can mean tens of thousands of dollars over the life of a mortgage, so each click of a percentage up when it comes to interest means a lot of money.
In the long run, it will be the inability of the borrower to pay off this larger principle that will cause homelessness. The principal is large because of the bad long-term credit report; however, the report itself did not cause homelessness.
Many banks will demand higher insurance payments depending on the down payment that a borrower comes in the door with. PMI insurance is a demand that many financial institutions will have for any down payment amount that is lower than 20% of the value of the home, which the bank will determine on its own.
– Less Leeway on Terms
Having a bad long-term credit report means that banking agents will not trust you as much. They will therefore stick to the rules when it comes to any late payments that you may make. Bankers always have discretion when it comes to initiating a foreclosure proceeding; it is quite in-depth. Many smaller banks actually do not want the property because it is difficult to get rid of. They would rather work with you, but if there is no trust between the banker and the borrower, they are left with virtually no choice but to stick to the agreement that is on paper. This usually means that late payments are one step closer to a foreclosure proceeding.
Much of the reason that payments would be late is because payments would be higher as per month based on a high interest rate. As stated before, a high interest rate comes from a bad long-term report. This links bad long-term finances and a mortgage payment yet again; however, again, the bad report itself did not cause homelessness.
Your Next Move
Knowing that your long-term finances are an extremely important aspect of how much money you will pay on a mortgage over time, you should try to come into a banking institution with the best long-term financial report that you can muster. The major financial rating agencies are known for making mistakes. Be sure that all of the black marks that are on your report are truly attributed to your financial decisions and not those of someone with a similar Social Security number.
Whether you are talking about a second mortgage or trying to get into the housing market, go to a banker with whom you have a previous relationship. There are many tools that bankers have at their disposal when it comes to mortgages because of the political firestorm that the 2008 crisis raised. Your relationship with your banker will determine your access to these additional financial tools.