Home Work

How to curb the rise in foreclosures

Jan 22, 2003 at 2:06 pm

You played your hand, and now the fun begins. The tree and wrapping paper have been disposed of, and a place on the shelf for that sweater you'll never wear (and should be disposed of) has been found.

Soon you'll receive another gift, but for many it's not one that can be returned or shelved. When the tab for your holiday extravagance arrives and you Discover that your Master has been Card(ed) and your Visa has expired, you'll quickly remember that the cost of buying a gift for everyone you came in contact with over that past year adds up.

Remember the old Everett Dirkson adage that a few dollars spent here and a few dollars spent there sooner or later adds up to real money. And so it is with many first-time buyers who where unable to come up with the traditional 20 percent downpayment for their first home and find themselves deeper in the hole of being leveraged to the hilt.

The result of these crippling housing obligations is that housing payments as a percentage of disposable personal income are up 45 percent since the Federal Reserve began tracking the statistic in 1980. And downpayment percentages for first-time buyers are near their lowest levels ever, averaging just 6 percent of a home's total value in 2001, according to the National Association of Realtors. That's down from 10 percent a decade earlier.

With first-time homebuyers stretched so thin, there's little room for even the slightest financial hiccup.

That's risky business in a sluggish economy. The latest numbers bear this out: Mortgage payment delinquencies and foreclosures are more frequent now than at any time since the Mortgage Bankers Association of America began tracking this information in 1972. And experts expect these numbers to rise in 2003.

There are two developments that have driven this housing boom — lenient credit card standards and historically low interest rates. As the housing market began to heat up in the 1990s, lenders relaxed their underwriting standards to obtain more business. Combined with some dangerous products, many financial institutions allowed total debt-to-income ratios to exceed the traditional percentage of 36 and to go as high as 50 percent in some cases.

Well, that's not a problem in good times — but when, for example, a job loss occurs to a highly leveraged buyer's income, disaster might be looming.

To avoid flirting with this prospect, adopt a philosophy that might cause many of you to avert your eyes from reading this article to completion: Be Conservative. Just because you've been approved for a mortgage doesn't mean you can afford it, especially in an economy that's slumping.

To avoid these pitfalls, buyers should follow the following guidelines:

· The downpayment and closing costs for a new home are just the beginning. Inflate your budget for repairs, fixing up, furniture, mortgage payments and taxes. You can be sure at some point that at least one of the above will succumb to Murphy's Law.

· Next, don't take on too much debt. Borrow less than what the bank will allow you to. As a guideline, the old-fashioned rule of thumb is that homeowners should put down a 20 percent downpayment and not dole out more than 28 percent of their monthly pretax income to a mortgage payment and property taxes. Total debt, including credit cards and car payments, shouldn't exceed 36 percent of one's pretax monthly income. Always make sure you have money left over after you pay all of your living expenses, including debt, and squirrel away that monthly savings.

· Plan ahead and, if you're planning on starting a family, really inflate your budget. Remember that kids take up space, eat food, need clothing and cost money all the way through college and beyond in some cases. And if one of you wants to stay home with Junior, you'd better not buy that new home based on two salaries.

· Finally, make sure you create and contribute to a rainy day fund. If it's not a priority, it should be. For first-time homebuyers, that might mean putting off home repairs until the savings account balance is repaired first. Even if your stars are in perfect alignment, you never know when the furnace might blow or the roof cave during a snowstorm. Remember, you can no longer call the landlord and say the magic words "fix it" like you did in the past. It's your baby and your responsibility — a job easily accomplished if you plan provide and practice.

An adequate downpayment that keeps your debt ratio low is ideal. Borrowing less than what you've been approved for is wise. And having enough money to take care of all your expenses, including emergencies, is priceless.

THIS WEEK'S TIP: Does the Chandelier Stay? Part I
You've found the home of your dreams? Aside from the big rooms, great lot and generous closet space, there are a lot of other features that make this the perfect home.

You just love the chandelier hanging in the dining room. The curtains and window treatments are perfect. So, too, are the antique cabinets on the kitchen wall.

But when you make a purchase offer, what are you really buying? Whether a seller is allowed to remove the chandelier when the house is sold or whether it stays with the property can present problems at the time of closing — problems that can be avoided.

When you purchase a home, you'll be buying what's considered "real property." Real property means anything that's part of the land or that's attached to the land. Real property might also be anything that's considered a fixture — something so affixed to the property that it becomes part of the property.

Home Work is a weekly column geared toward residential real estate.