Many people are taking out too much mortgage debt


January 19, 2003|By EILEEN AMBROSE

PATTY AND Don Kuklinski are looking for a bigger house with more land than their Abingdon home, and are prepared to take out a mortgage that will increase their monthly payments by about 20 percent.

But they are unwilling to pay 60 percent more a month, which would happen if they borrowed as much as the bank was willing to lend them. "It was so astronomical," said Patty Kuklinski, who sells textbooks.

"We're being very conservative, and I'd rather live my life that way," she said. "You never know what will come up in life."

Besides, Kuklinski added, they have other financial goals, such as travel and saving for retirement and their 11-year-old daughter's college education.

Financial experts say more homebuyers should be doing a similar self-assessment. Real estate agents and loan officers on commission have an incentive for homebuyers to take out the largest loan possible, but it's up to borrowers to determine the loan that fits their financial goals, lending experts said.

"Just because your loan officer tells you that you can afford X, you need to look into your situation more deeply than that," said Robert D. Walters, a senior vice president with online lender Quicken Loans in Michigan.

Some financial experts are concerned that people are taking on too much mortgage debt. "They think because their banker approves them for a mortgage that somehow they can afford it. It's not true," said Steve Rhode, president of Myvesta, a debt management firm in Rockville.

Rise in mortgage debt

Myvesta has seen the average mortgage debt of its clients increase 32 percent to $168,129 last year over the year before. One reason is that homeowners are refinancing and rolling credit-card and other debt into a new mortgage, Rhode said.

"It doesn't take a rocket scientist to realize that as your payment becomes a higher percentage of your income, you will be in a more tenuous position," Walters said. "If you were already on the brink, it doesn't take much" to put your mortgage in jeopardy.

Indeed, foreclosures hit a record of 1.15 percent of all mortgages in the third quarter of last year. Many of the loans belonged to younger, lower-income homeowners without the cash cushion to weather a job loss, economists said.

For years, the rule of thumb among lenders was that the monthly mortgage payment, including property taxes and insurance, should not exceed 28 percent of gross monthly income. Add in credit cards, car loans and other installment debt, and the recommended total debt was not to exceed 36 percent of gross income.

But these debt guidelines were loosened in the mid-1990s with the introduction of automated underwriting. These computer programs from Freddie Mac and Fannie Mae, which buy mortgages from lenders, look at many factors, such as the borrower's down payment, credit history and the likelihood of repaying bills.

"Twenty-eight and 36 is a thing of the past. We see debt ratios that exceed 50 percent all the time. Sometimes it can go up into the 60s ... rare, but it happens," said Walters, who sells loans on the secondary market.

More often, though, the total debt amounts to about 38 percent of income, lenders said.

The benefit to automated underwriting, lenders say, is it allows credit to be extended to borrowers who may not have secured a mortgage using the old guidelines.

Still, the amount a bank is willing to lend may not be what a borrower can comfortably afford, said Christopher P. Parr, a financial planner in Columbia.

For example, he said, say that income and Social Security taxes account for 30 percent to 35 percent of gross income, and another 10 percent is set aside for retirement. "If 50 percent of gross is going to a mortgage payment, how are you going to put food on the table?" Parr said.

Cost factors

Homebuyers should first factor in the cost of taxes, daily living expenses and long-term goals, such as retirement, a child's college education or a new car, and then see how much income is left for a mortgage, he said. "What is your cash flow? What monthly payment is comfortable given all these things you have to do?" Parr said.

Don't forget the cost of paying off credit cards. When lenders weigh a homebuyer's card debt, they look only at the minimum monthly payment, not how much is owed, said Bob Kaestner, a vice president with Bank of America in Towson.

Often a mortgage payment looks manageable on paper but throws a new homeowner into "payment shock," experts said.

You can avoid this if you "try your mortgage payment first," Rhode said. See if each month you can comfortably save the difference between what you now pay for housing and what your estimated mortgage will be, he said. If you can, then you'll be able to handle the bigger payment.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.