Several years ago, we foreclosed on our home. I hope you will learn from our mistakes with these tips to avoid a home foreclosure.
Up until now, I’ve only said it in whispers–and only to close friends.
Whenever someone would ask what happened to our house in Mississippi, my heart would sink a little, and I’d twist my mouth and slide my eyes into a cringe.
Several years ago, we foreclosed on our home.
It was something I never imagined I would do.
I grew up in a fiscally responsible (and conservative) household.
And I’ve always been a penny pincher myself.
But in our newlywed days, we bit off more than we would later be able to chew–in the form of a 1,300 square foot house.
The Road to Foreclosure
Oh I could make excuses–and perhaps some of them are valid.
We thought that by buying a small home with a monthly mortgage we could afford (at the time), we would be OK.
We bought at the height of the market, in 2006.
In 2008, around the time the housing bubble burst, we needed to move.
Still, we held onto that little house for four more years.
We rented it out to three different tenants. We didn’t make money on it, the rent all went to pay the mortgage. Meanwhile, we struggled to pay rent on the house where we were living in a different state.
We tried to sell the home in between renters. We prided ourselves that our meager savings and tenants had enabled us to never miss a payment.
By this time, we had gone from a two-income couple grossing around $60,000 per year to a single-income family with two toddlers, a third baby on the way, and barely surviving on $1,800 per month, 10 months out of the year (because my teacher husband didn’t get paid during the summer).
And then suddenly, without warning, our renter moved out. No one wanted to buy the house, and, this time, no one wanted to rent it either.
During those four long years, the neighborhood had declined, and the house was now valued at much less than what we owed.
We didn’t want to resort to this, but our real estate agent suggested we try a short sale.
Even though we knew we would be losing money, the offer we received soon after–albeit an offer for $50,000 less than we owed–came as a relief.
Until we checked off the one box on the paperwork that would seal our housing credit fate: Had we ever rented the house out?
Well, yes, we had. We had been renting it out for four years. But we hadn’t made any money on it (although we did claim it as income on our taxes).
It didn’t matter. The property was now considered a real estate investment, and, unbeknownst to us, our loan had forbade us from that.
Our only option was to pay up the $90,000 we still owed (which was impossible) or foreclose.
There are so many details of this story I’m leaving out, but suffice it to say that foreclosing on our house was one of the most humbling things we have ever been through.
We thought we had done things all right, but sometimes things can still go all wrong.
Never in a million years would I imagine we would be buying another house after our foreclosure on the first one. In all reality, my husband and I thought we might never buy a house again–out of both fear and lack of finances.
But I can say without reserve that God redeems the most broken of situations, and He brought so much light to a dark tunnel that seemed to have no end.
How we bought the house where we are now living is another story for another day. But for now, I want to share how we learned from mistakes–in the hopes that others can learn from them as well (and not make them like we did!).
5 Tips to Avoid a Home Foreclosure
1. Don’t buy a house if you don’t have a good down payment.
Financial guru Dave Ramsey recommends that home buyers make a down payment of at least 10%–and better yet, 20%.
When we purchased our first home, we didn’t have a down payment at all. At the time, we thought it was cheaper to buy than to keep throwing money down the drain through renting.
But while our monthly payment was cheaper than if we had been renting, we did not consider all of the other, longer-term responsibilities that home ownership would require.
With our current home, my husband and I took things a step further and made a 30% down payment. Yes, I know this is not always doable (at all!), and, yes, it can take years (or many, many, many late nights of working side jobs).
The main reason we put down 30% was because we wanted to avoid PMI (private mortgage insurance) because this would have upped our monthly payment.
But we also just feel much more secure with knowing we are starting out with way more equity than we did the first time around.
2. Pay close attention to the rules of your loan.
If we had paid closer attention to our loan’s rules, we would have known early on that we could not rent out the home. We had a first time homeowner’s loan that forbade it.
But we had not read all of our paperwork.
If we had realized that we could not rent out the home, we would have taken what we saw as a low-ball offer early into the time our home was on the market.
It was for $10,000 less than what we owed.
Yes, we would have taken a financial hit, but it would have been much less detrimental to our finances and my credit (the house was in my name) than the foreclosure.
We also could have short sold the home (and faced fewer consequences) if we had not rented it out.
3. Buy below your means.
Yes, I didn’t even say at your means. I said below your means. And when I say below, I mean you better make sure it’s below your means!
At the time we purchased our home in Mississippi, we actually did think we were buying it below our means. But there was so much we didn’t take into consideration: namely, a job loss or a move.
You never know when your means are going to lessen. It just takes one illness, one tragedy, one job loss.
Believe me, we’ve been there.
The circumstances surrounding our move are not something I need to share (but suffice it to say it was an extreme trial), but, regardless, we suddenly found ourselves in a situation where we owned a home in one state and were renting a home in another–at a time when we could barely put food on the table, much less pay the equivalent of two mortgage payments.
We now live in a 2,000 square foot home with a monthly payment that is low enough that we could still afford it if I were to stop working from home.
Would things be tight? Yes, things would be tight on my husband’s teacher salary if we had to live solely on it again, but we could make it.
If we were to have purchased a home based on the income I bring home as well, we would be living in a much larger house in a different subdivision.
But you know what? We are happy with where we are, and it’s thrilling to see a mortgage that is low enough that we could realistically pay it off one day.
4. Make sure you have enough money for home repairs and upkeep.
Renters have it easy when it comes to this. Most landlords make or pay for all home repairs.
This is not so when you are a home owner!
A week after we moved into our home, we had a leak in a wall. The very next week an upstairs bathroom flooded and destroyed the kitchen ceiling!
It is vital that home owners have some wiggle room in their budgets for both expected upkeep and unforeseen repairs.
5. Buy a house that will be sellable down the road.
This was a major mistake of ours the first time around. We bought one of the smallest homes in the neighborhood, and it only had two bedrooms and no garage.
We found out later that two-bedroom homes without garages are extremely hard to sell!
This time around, we made sure we found a home with a garage. We also wanted at least three bedrooms (we ended up with four!).
Although I’ve been embarrassed for people to know about that time we foreclosed on our house, my hopes are that by telling our story someone else will be encouraged–and may even avoid a home foreclosure themselves.
What are your tips for how to avoid home foreclosure?
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I know that wasn’t an easy one to write. But I know that God will use your transparency to encourage others in the same place. I can’t believe it’s already been three years! Love you!!
Thank you so much, friend! Love you too! (Why are we both still up?! LOL)
I’m wondering, how were you able to purchase a house with a foreclosure on your credit score?
Leah, It is complicated, but basically, Erin’s name was the only one on the loan for the first home. I was in school and only working a few hours a week. We bought this home with only my name on the mortgage, so they didn’t do a check on her credit history. We are not huge fans of the credit score myth anyway. Check out these posts from Barry at StacyMakesCents…http://www.stacymakescents.com/?s=credit+score+
Thank you for your honesty! My husband, daughter, and myself live with my brother in law, his wife and their 3 children in a large home with the intent of helping each other raise our children in God’s Word and to be able to have more of a homestead property to facilitate Bible events. We both, however, own homes in different states. The other homes have been a major trial in different ways for us both but we’ve been able to help each other out financially when necessary and encourage each other to lean on God. You can learn so much from tribulations! So many people out there are going through the same issue of owning homes in different states so thank you for your transparency and advice to our debt laden culture!
Bless you for being able to speak about things like this, it’s just one of the reasons I love your posts. Though we can plan and plan some more, it is impossible to come up with all conceivable circumstances of life. I won’t go into details, but I will say that we are walking through something that could place us in those same circumstances, but it was either move or be unemployed. I am happy for your family because you could still buy something! I pray you will be blessed in it.
Thank you for this article! My husband and I were debating whether or not we should look to buy a house or continue to rent. We thought the same thing too, “Why rent when it’s cheaper to buy?” We even went as far as house hunting with an agent when I started thinking and doing more research. We decided to put it off for awhile and I am so glad I did and read this now because I realized that we aren’t ready yet. The Lord has a plan for us and maybe if it’s in His plan, we will buy!
I really enjoy the fact of how down to earth and real your writings are. I can very much relate to you in this article. My family found ourselves in the same situation around the this time as well. It’s been a long road to financial recovery. Patience is a big must. We are so ready to buy or build our own home now,but we are trying to do it below our means. It would be easy to just jump into something because one is eager. I think your advice is very wise. Thank you for being real and humble. 🙂
Thank you for your courage to share this! I share the same embarrassment. My husband and I bought a house when we shouldn’t have. We ended up having to move, and leave the house, to save our marriage. We decided our marriage was more important than our financial situation. We had tried to sell it, then to do a short sale, but we ultimately had to let it go into foreclosure. We broke all the rules that we had heard before hand, thinking that we knew better and our situation was different, and it didn’t end well. 1) Don’t buy a house in your first year of marriage. 2) Live in a city for a year or maybe even 2 to make sure you want to remain there before you buy a house. 3)Have at least a 10% to 15% down payment. 4) Buy under your means.
While I’m embarrassed and feel guilty that we had to let that house go into foreclosure, I’m just so thankful that my family is together and whole, and healing. We are learning from our previous mistakes and moving forward.
Thanks for sharing your experience! We also went through a foreclosure. Actually a Deed in Lieu, but it’s treated the same as a foreclosure; so we have to wait 3 years before we can purchase again. We’ll be able to get a mortgage in January 2016. Were you able to get a mortgage before the 3-year waiting period?
Your tips are perfect! We bought above our means when the market was good and values were supposed to go up. We made other mistakes along the way but have definitely learned from them. The biggest mistake was re-financing to pull out equity. We would probably still be in our old home if we hadn’t done that.
Thank you for sharing this.
Melody Maynard @ Joyfully Ever After
Thanks for the great tips, Erin! I can only imagine how difficult that was to go through. My husband and I are happily renting . . . We had talked about getting a loan and looking for a first house in an attempt to just get settled down immediately, but we decided that that would stretch us to our absolute max and one pregnancy with the cost of a house would probably leave us dependent on government aid. Something we want to avoid if we can . . . Thank you for writing honestly!
Thanks for writing this post, and being so open 🙂 Your blog is a blessing to me!
Hubby and I are facing this exact situation right now. Selling our two bedroom, no garage house in another state and trying so hard to hang on to it til it might sell someday in the far off future. He bought just like you at the peak of the market, then everything dropped less than a year after he signed papers. Then we got married, family of three now, moved out of state…yeah almost exact same situation. But our God is able, and we’re trusting Him to sell it or help us make it through, and trying desperately to not foreclose (though it has been mentioned between us).
Keep writing your grace-filled posts! Thanks!
Anna @ Feminine Adventures
One of my favorite posts here… in large because it could have happened to us too. We bought just a couple months before the market crashed. The tale of that house is roller-coaster of lessons. Thankfully, we were able to sell it last year (for not quite as huge of a loss as I feared) and finally be out from under it. Sure makes me look at the “American Dream” of owning a home differently!
Thank you for your honesty and great advice!I’m so glad to see how God has blessed you!
Thank you so much for sharing this. We just saved our home from foreclosure.
The things I would recommend. .as soon as you have an issue paying call.
2nd when looking for a loan ask how there loss mitigation program works. If they don’t have one..run!
Always be honest with the bank and don’t over promise payments.
It’s nice to know we aren’t the only ones who have struggled with this
My husband & I have been through similar circumstances & we sometimes wanted to hide because we were ashamed. Our pride was our major hurdle. Then one day, the Lord changed my viewpoint on the whole situation. I started using my story as a way to encourage others to see that our situations are not hopeless. This changed my whole perspective because through all the rough times we never once went without food, shelter or clothing. Jobs came & went, locations changed, car problems always happened at the wrong time – but God provided everything we needed, every time! When you learn the difference between wants & needs you come to the point of abiding in the Lord! To have the God of all creation holding you in the palm of His hand you can then share His great love with others freely!
Thank you so much for sharing your story. My husband and I went through a similar experience at about the same time you did and it was one of the hardest experiences of our lives. We chose to go through with a deed in lieu of foreclosure on the first home we had ever purchased. Our home finally sold for 50% of what we purchased if for 7 years prior and one third of the homes in our neighborhood were abandoned or foreclosed. It was a very discouraging time. There were many reasons we chose this option and just like you I was hesitant to talk about it with anyone. Looking back, we know it was the best and only decision we could have made and we have learned so much. Your advice to people considering buying a home is great and it was very comforting and uplifting to read your story. Thank you for your honesty. God bless you and your family!
There is no shame in foreclosure, especially in the economic downturn we just experienced. Many families felt this pain, and no amount of emergency savings or better preparedness would have assisted them. Sometimes, after both you and your spouse have lost your job and have been unemployed for 6 months (or more!) there just aren’t many choices. I did want to make a note about your post. You defaulted on your loan, the bank foreclosed on your house. You couldn’t have foreclosed on your own house. You might find it helpful to change the wording of this post a bit to say “That time we defaulted on our house loan” or “That time the bank foreclosed on our house”. The entity loaning the money is the entity that forecloses. Also, if I can encourage anyone that is facing foreclosure to 1) talk to your bank. The bank isn’t the enemy. Some states have laws requiring mediation before foreclosure. 2) If the bank isn’t helpful, speak with an attorney. The attorney might be able to suggest something that would help you. My heart goes out to anyone facing foreclosure.
Buy a home for cash. There are plenty homes for cash that can be remodeled..this will help avoid foreclosure all together and your home is immediately yours.
Thank you got opening up and sharing a painful part of your past. I know that this must have been a difficult thing to do. However, you were willing to do it so others might learn from your mistakes.
We have all made mistakes in the area of our finances. Thank you for sharing so that others can learn from yours. I love your posts and the humbleness and honesty with which you write them. Hugs and a prayer to you that God will continue to bless you and your family through your work!
I never thought of the fact that they might not let you rent out your house! …Going to go read my paperwork…
And… it’s OK to struggle. I think everyone does, so having someone be honest about it is so refreshing. Thanks for sharing.
Rachel @ A Mother Far from Home
You truly lived up to your blog name on this post. We almost bought a fixer upper a few years ago in Australia (where we were living) and let me tell you it would have been unwise on so many levels. Thanks for this post and your humility.
It really is hard to avoid foreclosure and it’s great you gathered and provided those information. Your advice can be of a great help to all your readers. Thank you for sharing! Regards.
Thanks for being honest, as that is so needed with this topic. my husband and I have made huge mistakes with our mortgages and money. And it was a breath of fresh air when you spoke of this. Recently we made another bad choice, and now are thinking we need to scale down to get ahead of things. Needless to say don’t risk your home for a business venture. Reading your article has given me the courage to face the days ahead for my family.
Thank you for sharing such a personal experience. I feel like it’s hard to not live outside our means when it seems like everyone else has more than us. My husband and I have looked at buying a home, but we don’t quite have everything in place that we would need to really be comfortable with it. So, I really appreciated the point you made about buying below your means because it can be so easy to justify buying right at or right above our means, thinking we can figure it out as we go!
I got here through a search investigating whether Netflix would have good programs for my preschool foster daughter, and this post is very refreshing for me! We bought our small, overpriced house in a little town outside of Detroit in 2006, and from 2009 to 2010, my husband, our only income earner, suffered mysterious health issues that finally led to his receiving an implanted defibrillator. For a year, his blackouts made it illegal for him to drive, and the medication he was on impaired his thinking. He was rudely fired from his youth pastor job, and our little home managed to lose half of its purchase value. We did get a short sale offer, but the PMI company rejected it because the loss would be too much for them. We didn’t qualify for any of the help programs because we were current on our payments and hadn’t filed for bankruptcy since the house was our only debt. We finally gave up and foreclosed. We rented for 4 years, and reluctantly bought another house last year when our landlord sold the rental while we were living in it. I am still not comfortable with having a mortgage even though we put down 35% of the house value. It is great to hear from others who have had a similar experience – to know that we are not alone in this and to be encouraged that recovery from foreclosure trauma is out there! Thanks for sharing your story!
I always feel a little sorry for all the people that were married in 05/06 because this was almost inevitable. I am so thankful we just happened to get married in late 07 and bought ion 08. Just better timing! It just happened that way. I had no idea what was going on with the market at the time.
It was wonderful of you to share your story, and what you have learned. I believe that it will be a help to many.
Thank you, Laurie! I really hope so!
Thanks for sharing this, it’s so hard to admit financial struggles, but if more people knew the potential difficulties in homeownership, it could save many heartaches. We have been through many trials and gotten into some credit card debt and had to scratch and claw our way back out–it is no fun! Thanks for your honesty, love your blog 🙂
Thank you so much, Carly! I appreciate your encouragement!!
Thank you for sharing your story. We, too, are facing foreclosure. Not for the same reasons but with the same end result. It feels like a nightmare. We have been in our home for 17+ years. The area became too expensive, our jobs couldn’t match the increase, then my husband was hospitalized. We fell quickly behind. We had to declare bankruptcy for the medical debt but we can’t save the house. We are moving out of NJ and will live with our oldest son and his wife. The good news is that we will be closer to family. The bad news is that we won’t have jobs when we move to the new state. The good news is that we won’t be homeless with our 3 college-age commuter children and our pets. God will show us the way!
It can be tough to come up with a down payment for a house, but it’s important to make sure you have enough saved up before you take the plunge. A down payment of at least 20% of the purchase price is usually required, but some lenders will offer more generous terms. If you can’t come up with a down payment on your own, consider talking to a lender about a mortgage that requires less down payment.