A home debtor, as the term suggests, refers to an individual or entity who is under the financial obligation to pay off a mortgage or loan secured by their home. In simple terms, if you've borrowed money to purchase a house and are still in the process of repaying it, you're a home debtor. The term stands in stark contrast to "homeowner," which implies a person who fully owns their residence.
Unlike creditors who lend money, debtors are those on the receiving end of the financial spectrum—they owe money. This debt could be in various forms, ranging from a bank loan, making the debtor a borrower, to securities such as bonds, where the debtor is known as an issuer. The terminology further extends to someone who voluntarily files a bankruptcy petition, thereby legally becoming a debtor.
Fundamentally, debtors, or in this context, home debtors, cannot be incarcerated for not paying consumer debt such as credit cards. However, courts have the authority to take punitive measures against debtors for unpaid taxes or child support. Moreover, the Fair Debt Collection Practices Act (FDCPA) provides protection to debtors, preventing collectors from threatening jail time.
Should a debtor fail to fulfill their debt obligations, they might face significant repercussions. These might include credit score decline, legal action from the creditor leading to potential liens or encumbrances, and in the case of home debtors, the risk of home repossession.
In today's economic landscape, home mortgage loans have emerged as the predominant method for Americans to purchase houses. Banks, who are the primary lenders, possess insurance coverage to protect them against mortgage defaults. It is noteworthy that the majority of Americans live in homes that, despite ongoing payments, are essentially still owned by the lending banks.
Typically, it is uncommon for more than 20% of a home to be paid off at the time of purchase, meaning most people commence their journey as homeowners with significantly less, or even no equity. Should the cost of the home become overwhelming and advantageous refinancing options become inaccessible, the individual transitions into becoming a home debtor.
The housing bubble crisis of 2008 led to a significant number of Americans losing their homes as they found themselves owing more on their mortgages than their homes were worth, a situation commonly referred to as being "underwater." This incident illuminated the vulnerability of home debtors, especially during economic downturns.
In response, the Federal government introduced initiatives such as the Home Affordable Refinance Program (HARP) and Home Affordable Modification Program (HAMP) in 2009. These programs aimed to assist struggling Americans by helping them secure approved refinanced loans. Subsequent legislation, like the Housing and Recovery Act, also sought to alleviate pressure on home debtors.
Being a home debtor signifies being engaged in an ongoing struggle to pay off home-related debts. Various protections, remedies, and programs exist to support home debtors, but the journey to becoming a fully-fledged homeowner can be a challenging financial path, fraught with complexities and potential difficulties.
Summary
In contrast to the term “home owner,” home debtor is reserved for those who will seemingly never be able to pay off the mortgage(s) on their home, or who have already defaulted.
Most Americans live in homes that they pay on, but are still primarily owned by the bank that loaned them money. Banks have insurance to protect them against mortgage defaults. Home mortgage loans are the primary way that Americans by homes today.
It is exceedingly rare for more than 20% of a home to be paid off at the point of sale, and most people start with significantly less equity than that — if any. When the costs of the home become overwhelming to the home-buyer, and they no longer have advantageous options for refinancing or paying off their home, they are sometimes referred to as home debtors.
Many Americans lost their homes in the wake of the housing bubble in 2008, when the value of their homes shrunk significantly and they found themselves underwater on their home mortgages. The Federal government started the HARP and HAMP programs in 2009 to help struggling Americans get approved for a refinanced loan.
The Housing and Recovery Act and other legislation has sought to alleviate some of the pressure on home debtors.