Experts help buyers avoid debt trouble

Trends in the real estate market combine rapidly escalating home prices with an eagerness on the part of buyers to own property. With historically low interest rates over the past decade, competition for a limited supply of houses has driven prices through the ceiling.

These factors — and others — lead some consumers to become overburdened by their mortgage.

Struggling with mortgage payments is not limited to those on limited incomes or first-time home buyers. Seemingly wealthy buyers and those who have upgraded their real estate holdings many times also can find it hard to keep up.

The reasons for an imbalance in the family budget are many — illness, unemployment, divorce, or a spouse choosing to shorten work hours or eliminate a job after having a child.

For some homeowners, though, the problem begins when they sign the loan documents committing themselves to a mortgage that is larger than they can handle.

Although most lenders are careful to work with their clients to find a loan appropriate for their needs, some lenders will qualify buyers based on their income and good credit without focusing enough on other expenses and life changes that can affect their ability to make the required payments.

“To be fair to mortgage companies, they are trying to help people get into a home so they can begin building equity and wealth,” says Phyllis Westall, housing and education manager for the Credit Counseling Network in the Washington region.

“They will use your gross income and look at different types of ratios depending on the individual circumstances of the buyers,” she says. “But people need to be aware that the amount they will qualify you for will always be more than you will be comfortable with.”

Although Ms. Westall warns consumers of the danger of jumping in to buy a home without understanding the costs, she also recognizes the value of homeownership.

“Housing prices rose 22.7 percent in Washington, D.C., from the end of the first quarter of 2004 to the end of the first quarter of 2005,” she says. “Potential buyers can’t possibly save that much from one year to the next, so they are eager to get into the market so they can begin earning that kind of return on their money.”

“A home is a great long-term investment and equity builder, plus the tax break is always a factor,” Ms. Westall says.

“Making the stretch to own a home is usually worth it, especially if it can be done with a fixed-rate loan so the buyers are not continually making a higher payment,” she says. “Making the stretch now and budgeting to make the payments will be worth it because later the property becomes an asset.”

Consumers have a hard time knowing how much they can afford to borrow, particularly first-time buyers, who might be less financially savvy. The experts interviewed for this article differ over whether current rent is an accurate gauge, considering the tax implications of ownership. Yet home prices have zoomed upward much faster than people’s paychecks.

“I’m very conservative, and I think the automated underwriting system often approves people for a loan that is larger than they can handle,” says Phil Drew, branch manager of the McLean office of Carteret Mortgage Corp. “I recommend that the old ratios should actually be followed, which means that 28 percent of the gross monthly income should be spent on housing payments, including principal, interest, taxes, insurance and homeowner association fees.”

“Thirty-six percent of the gross income should be the total debt amount,” he says. “In other words, only 8 percent of the income should be spent on consumer debt. I realize that’s pretty difficult, since anyone with a car payment could go over that limit pretty quickly.”

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