Foreclosure Hitting Well-Off Families Too

The More Money blog reports that foreclosures are hitting well-off families too. Consider these statistics on a recent study of foreclosure filings:

20% of the filings went to households with more than $100,000 in annual income.

35% of homeowners who received a foreclosure filing had lived in their homes for more than 10 years. These were not people who’d bought too much house, but more likely people who lost their jobs and suddenly couldn’t afford the payments.

The piece also notes that “it was very rare for just one financial setback to lead to the foreclosure. It wasn’t just a high-interest-rate, high-payment subprime loan that might have caused a foreclosure; it was a bad loan and then a job loss. Alternatively, it wasn’t a job loss that caused an affordable loan to go bad; it was a job loss and a health issue.”

I have a few thoughts on this issue:

1. Without a job, almost any financial plan goes south rather quickly. That’s why it’s important to have a good-sized emergency fund — to help you try and recover from a job loss as soon as possible. I’m working on a piece centered on “protecting yourself in case of a job loss” that will give additional ideas on how to prepare in advance for a potential firing/lay-off. I hope to have it done sometime soon.

2. I can see how a one-two punch like job loss/health problem can be very tough. And it’s not too difficult to imagine them coming together. For instance, assume you have a working couple, one of them gets sick, loses his job, and now the family gets hit with both a loss of income as well as mounting medical expenses. Tough to recover from this unless your finances are rock solid.

3. The above scenarios are arguments for being debt free. Someone who’s been in their home for 10 years should have it paid off (or close to it) IMO — assuming they used the right formula to buy their house in the first place.  It’s not that difficult to pay off your mortgage in a decade if you apply some basic principles.

4. Don’t take a bad loan. I know this kind of goes without saying, but it’s noted above as one of the two factors needed to derail a homeowner. Why start out with one strike against you, knowing that you only need one more (a job loss, health problem, etc.) to sink the ship?

5. Some of these people (probably a good percentage) had to be in trouble because they bought too much house. So let me reiterate how important it is to buy a house you can afford. Stretching to meet a mortgage is placing your finances at great risk as one major setback can cause the whole house of (financial) cards to come down.