What Foreclosures Cost

Posted on September 29th, 2008 by Samanta Parks

The huge costs of foreclosures have brought about an increased awareness in those involved in the industry. These people include insurers, government officials, homeowners, investors, and services. Below is a summary of what foreclosed homes cost these various entities.

The cost of a home foreclosure for the homeowner largely depends on how involved the homeowner is with the home. The costs to the homeowner are emotional pain, credit loss, financial loss and material loss. There may also be the cost of a change in lifestyle and status which could be devastating to the homeowner depending on how extreme the homeowner’s circumstances are. When a foreclosure occurs, the homeowner can lose the equity in their home, tax benefits, and the money they may have paid toward the home such as upgrades and a down payment. The homeowner will also have to pay some legal fees and moving expenses.

When a homeowner defaults on the home loan, the one that holds the loan takes on the loss. A lender or bank services a home loan and keeps it in its portfolio prior to being sold to a real estate investor. So a lender or bank takes a direct loss when the homeowner defaults. The home loan will then stay in the portfolio of the lender longer because it will be difficult to sell the loan.

When a mortgage loan is bought by an investor, it will be use a loan servicer to take care of the house payments the borrower makes. The loan servicer will handle everything that needs to be taken care of in order to keep the home mortgage in good standing. This involves paying all taxes and insurance. When a home owner defaults on a mortgage the loan servicer takes a loss because of the agreements that have been made between the investor and the servicer. The terms of the contract will usually involve the steady payments of the interest and principal to the real estate investor by the loan servicer as long as the home loan is in security. Therefore, the loan servicer will continue to make the mortgage payments to the real estate investor by using their own money until the home in foreclosure or default has been purchased.

Other costs that are incurred by the loan servicer or lender when a mortgage is defaulted on include collection and staff costs for the time that was spent trying to contact the borrower and trying to find a solution to the default. The homeowner’s documents are reviewed and depending on the terms, current status, and ability to pay the debt, a solution can be worked out. If a solution is not found, the foreclosure process continues.

Other costs include appraisal costs to find how much the property is currently worth and maintenance cost to ensure that the property is kept in good condition. There are also costs related to principal, insurance, interest, and taxes. The servicer or lender needs to continue to make payments for these things whether or not the homeowner defaults.

Court costs and court fees are often part of the foreclosure costs along with marketing costs that may come about when trying to advertise and sell the property.