Cover story: Planning takes fear out of mortgage

As waves of foreclosures have crashed into local housing markets, attention has been focused on how to help homeowners struggling to keep their homes.

While many of these homeowners are in trouble because of unforeseeable circumstances such as job loss, reduced income or an illness, some of the financial problems they face could have been prevented through better pre-homeownership education and financial counseling.

Some homebuyers may be delaying buying a home purchase out of fear of becoming a foreclosure victim, but with sensible planning and a budget, a purchase can be less frightening.

“The best advice I can give to a potential homebuyer is to take a home-buying class that will teach them everything about budgeting, mortgage loans and choosing the right property for their needs,” says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling (NFCC).

“Perhaps even more important is that consumers should never feel rushed or forced into buying a home,” she says. “Home prices are more affordable right now, and interest rates are low, but consumers are much better off if they are fully prepared to buy a home than if they rush to take advantage of the market. Give yourself time to budget, plan and, most of all, save, before buying a home.”

Budgeting for a home

Paul Defngin, a mortgage planner with the Parsons Mortgage Group at Apex Home Loans in Rockville, Md., says all potential homebuyers should sit down with a budget before considering whether they can buy a home.

“Everyone should know what money is coming in and what is going out,” Mr. Defngin says. “People think they can afford to pay more for a mortgage than for rent, but if they are not disciplined enough, they may find themselves in trouble.”

Mr. Defngin says that although lenders will look at the borrowers’ debt-to-income ratio to qualify them for a maximum loan, consumers should determine for themselves a comfortable level for their housing payment and budget.

HomeFree-USA, a housing counseling agency approved by the Department of Housing and Urban Development, assists consumers before they buy a home and helps homeowners avoid foreclosure. HomeFree-USA provides the following list of questions for potential homebuyers:

• Do I have a good, steady source of income (usually a job)? Have I been employed regularly for the past two to three years? Is my current income reliable?
• Do I have a good record of paying my bills?
• Do I have few outstanding long-term debts, such as a car payment?
• Do I have money saved for a down payment?
• Do I have the ability to pay a mortgage every month, plus additional household costs?

While individual borrowers have different income levels and therefore different budgets for housing payments, most lenders follow the guidelines that monthly mortgage payments should be between 29 percent and 31 percent of monthly gross income. The total monthly debt-to-income ratio usually must be a maximum of 45 percent of monthly gross income, including housing expenses and non-housing expenses, such as a car payment, credit card payments, student loan payments or child support costs.

The debt-to-income ratio requirements vary by lender and individual circumstances. For instance, borrowers with a high credit score and significant savings may be able to qualify with a higher debt-to-income ratio than a borrower with a low credit score, a lack of job stability or few cash reserves.

Mrs. Cunningham and the NFCC recommend that consumers spend no more than 30 percent of their take-home pay on housing costs and no more than 20 percent of their take-home pay for other debt service such as car payments.

“Unlike lenders, we base our recommendations on consumer take-home pay rather than their gross pay, since, realistically, that’s what they have to work with to pay their bills,” Mrs. Cunningham says. “People will find themselves hamstrung if they are spending more than 50 percent of their paycheck on paying their debts, because they still haven’t paid for their food, their utilities, child care and other bills that fluctuate.”

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