There has been a lot of media coverage about ‘Foreclosures’ in America. There were reports of houses selling for less than the price of a car…So what exactly is happening in America - How come the house prices are so low but still there are no buyers..

What Is Foreclosure

When you purchase a home, the lender takes a security interest in your house. In the future, if you can’t afford to make your mortgage payments, the security interest gives the lender the right to foreclose–auction off your house and keep the proceeds (to recover his investment). Foreclosures will seriously affect your ability to qualify for credit in the future.

But How Come So Many Are Unable To Make Mortgage Payments

In one of my earlier posts, I wrote about Sub-Prime crisis. In that post I wrote about how large global pool of money was used to lend to people who were looking to buy a home. On the surface these loans don’t look too bad but on closer inspection these loans had ‘disaster’ written on them (right from the beginning). Here are two main reasons why these loans have caused so many foreclosures:

1. The amount of loans offered was way more than what that person is eligible for. If they got a loan through traditional methods, these borrowers would not qualify for even half of what they were offered.

2. The repayments were not very high for the first couple of years…And after that the repayments ballooned. It is when the repayments ballooned, that the reality sunk in for many borrowers - they could not afford the repayments - in many cases the repayments were more than their salary….

And Then…

Some of these houses are being sold at price less than what a new car would be sold for. Even at these ridiculous prices, most sellers are struggling to find buyers - mainly because there is a huge credit crunch and not many people have the spare cash to buy the property (also because of loss of jobs due to slowing economy). You can even buy one of these properties on eBay.

If you are tempted to buy one of these properties, be careful and do your research. It might be affordable but you might actually not find any tenants and hence not get any return on investment. The pundits don’t think the market has hit its bottom yet.

Apparently a lot of people are making huge profits by investing in these homes. Whatever you do - research, understand the steps involved, study your options and only then make a decision.

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